Pricing day is a huge milestone in the initial public offering (IPO) journey. It is the culmination of months of preparation and drafting and being out on the road talking to investors. Before you hit the road, you’ll have filed a registration statement that includes a prospectus with a preliminary price range and number of shares to be offered in your IPO (your Preliminary Prospectus). This is also known as the “price range prospectus,” and will be given to investors at the beginning of your road show. It is during the roadshow that you’ll get an idea of investor demand for your offering, so that you can price your offering and finalize your order book. It’s possible that demand will be much greater than expected, in which case you may want to “upsize” your deal by increasing the price, the number of shares offered or some combination thereof. Alternatively, demand could be much less than expected, in which case you may want to “downsize” your deal by decreasing the price, the number of shares offered or some combination thereof.
To get a lay of the land, recall that you filed the Preliminary Prospectus at the start of the roadshow. The preliminary price range included in that Preliminary Prospectus must be a “bona fide estimate” of the range of the maximum offering price and maximum number of securities offered as required by Item 501(b)(3) of Regulation S-K.[1] So long as this is a “bona fide estimate,” this price range prospectus can be circulated to investors, and you can take this prospectus on the road. That “bona fide estimate” may change during the roadshow depending on demand, of course, in which case you may determine with your bankers to file an updated Preliminary Prospectus before pricing to update your preliminary price range and/or the number of shares offered. This directly impacts the amount of any upsize available to you at pricing.
The next step in your path to going public is having the US Securities and Exchange Commission (the SEC) declare your registration statement effective. Your offering cannot price until the registration statement has been declared effective. Once declared effective, the underwriters will work with management and your pricing committee to determine the final price and size of the offering and finalize the order book, and then they will begin to confirm orders. You will file a final prospectus using Rule 424(b) (your Final Prospectus) within two business days of pricing the IPO. This Final Prospectus includes the final pricing information determined on pricing day, replacing the preliminary price range and number of shares to be offered in the price range prospectus. Whether you have to file anything in addition to the Final Prospectus depends on (1) whether you need to register additional shares and pay additional related filing fees to the SEC and (2) whether you are making any changes to your offering other than pricing information, such as to your use of proceeds.
Because pricing an IPO occurs during a short window of time between effectiveness and order confirmation, and is often uncertain until very late in the process, you will want to avoid having to make last-minute filings to update the pricing information in your Preliminary Prospectus that could potentially delay your IPO, or worse, jeopardize your IPO completely. You can avoid this with proper advance planning and an understanding of the parameters within which you can upsize or downsize your IPO and what additional steps you might have to take prior to confirming orders.
For in-house legal and/or business teams preparing for your IPO, here are the key takeaways to consider in order to be prepared to upsize or downsize your offering.
Timing matters: The moment of effectiveness
Why can’t you simply amend your registration statement to change the pricing terms in the event of an upsize or downsize?
Before effectiveness: Until the SEC has declared your registration statement effective, you can always file a pre-effective amendment with a new price range and/or number of shares offered as a matter of law. However, in practice, it is very likely that doing so would be undesirable, because (1) you will need to prepare the amendment, obtain a new auditor’s consent, and clear any additional comments from the SEC to the amendment, which could take considerable time and put pressure on deal timing and execution, and (2) it provides pricing information to investors that may be premature or that you may wish to avoid revealing. If demand is low, a pre-effective amendment could signal to the market that the deal is not well-received. Moreover, delays to the deal run the risk of scaring investors and potentially jeopardizing the offering entirely.
Even if demand is high, a delay could provide time for market conditions to deteriorate or investors to reconsider or invest elsewhere. Of course, it is possible that demand is so high that the risks presented by such delays are worth the ability to raise considerably higher proceeds. In some cases, a pre-effective amendment with an increased preliminary price range may be a strategic marketing signal to potential investors about significant levels of demand at higher prices. Relatedly, as discussed further below, the parameters that dictate how much you can increase or decrease your offering at pricing depend in part on the preliminary price range in your Preliminary Prospectus at pricing, not the price range you started with when kicking off the roadshow.
After effectiveness: Once the SEC has declared a registration statement effective, a handful of rules under the Securities Act of 1933 (the Securities Act) and related guidance under Compliance and Disclosure Interpretations (C&DIs) allow for pricing outside the bounds of the price range and number of shares offered in the Preliminary Prospectus, within specified parameters. Accordingly, if during your roadshow you determine that it may be necessary to upsize or downsize your offering at pricing, there will be a couple of key considerations:
- By how much can you increase or decrease your offering at pricing without delays to your offering, and how do you calculate that amount?
- Do you need to pay additional filing fees with the SEC in order to increase or decrease your offering at pricing?
We discuss the relevant rules and analyses used to help answer these questions below.
Rule 430A: The 20% safe harbor and materiality
By how much can you increase or decrease your offering at pricing without delays to your offering?
Rule 430A provides a safe harbor under Section 11 of the Securities Act that enables the issuer to update its pricing-related disclosure in the Final Prospectus for the IPO (i.e., the prospectus used after the registration statement goes effective to confirm orders with investors) rather than in an amendment to the registration statement prior to effectiveness. Under Rule 430A (together with related C&DIs), such updated pricing terms, when filed in your Final Prospectus following pricing, will automatically be deemed to have been part of the registration statement as of the effective date. However, to use Rule 430A, the aggregate size of the revised deal must fall within a “20% safe harbor.”
If you fall within the 20% safe harbor, then you can move forward and price your IPO without updating your Preliminary Prospectus through a pre-effective amendment, provided you include the updated offering terms in your Final Prospectus. That said, even when a revised deal falls within the 20% safe harbor, you should consider when a change in offering size may warrant changes to other disclosure in the prospectus to avoid a material misstatement or omission under other liability sections of the Securities Act, despite the pricing changes themselves falling within the 20% safe harbor. In addition, you’ll still need to consider whether you need to pay additional filing fees to the SEC at pricing. More on these later.
The interplay among Rule 430A and related C&DIs is summarized in the chart below:
| New maximum deal size is ? 20% | Rule 430A’s safe harbor applies. As a result, the final price per share and offering size may be reflected in the Final Prospectus after effectiveness. However, consider whether additional disclosures impacted by the change in pricing terms may be needed at pricing under other Securities Act liability sections, as discussed further later. Instruction (a) to Rule 430A and C&DI 227.03 |
| New maximum deal size is > 20% | Rule 430A’s safe harbor does not apply. As a result, you must consider whether the pricing changes are material. If no, then the final price per share and offering size may be reflected in the Final Prospectus after effectiveness. If yes, then you must file a post-effective amendment or a new registration statement reflecting the final pricing terms and any material changes to the disclosure. This effectively delays pricing and the IPO, as either option requires further SEC review and a new declaration of effectiveness by the SEC. Instruction (a) to Rule 430A and C&DI 227.03 |
How do you calculate the Rule 430A safe harbor amounts?
There are two different ways to calculate the 20% range that is allowed under Rule 430A and the related guidance. One calculation is typically used for upsized deals and the other calculation is used for downsized deals.
For upsizing: Use Rule 430A
To calculate your maximum possible upsize amount, you will multiply (i) your preliminary maximum aggregate offering price (PMAOP) – which is the product of (A) the highest per-share price in your preliminary price range and (B) the number of shares in your preliminary offering inclusive of the shares that may be sold at the underwriters’ option (the greenshoe shares) – by (ii) 120%.
In other words, you can increase the price per share and/or number of shares, so long as the changes in price and volume result in a new maximum deal size that is no more than 120% of the maximum deal size in the registration statement fee table (including the greenshoe shares) at the time of effectiveness.
For downsizing: Use C&DI 627.01
To calculate your maximum possible downsize amount, you will first multiply (i) the product of (A) the highest per-share price in your preliminary price range and (B) the number of shares in your preliminary offering exclusive of the greenshoe shares by (ii) 20%, and then subtract this amount from the product of (A) the lowest per-share price in your preliminary price range and (B) the number of shares in your preliminary offering exclusive of the greenshoe shares.
In other words, you can decrease the price per share and/or number of shares, so long as the size of the new deal is not less than the lower end of the deal size reflected in the price range prospectus, minus 20% of the maximum deal size reflected in the price range prospectus.
See Appendix 1 for sample calculations illustrating how to calculate whether you fall within the 20% safe harbor described here.
The big picture: Securities liabilities and the legal framework for pricing disclosures
What Securities Act liability sections do you need to be mindful of?
There are two liability sections of the Securities Act to keep in mind during pricing discussions: Section 11 and Section 12.
Section 11(a) of the Securities Act imposes liability on the issuer, underwriters, or anyone who signed or helped prepare a registration statement if any part of a registration statement, at the time it became effective, “contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.” Therefore, your Section 11 liability only covers statements made in your registration statement at effectiveness. All of the information in the registration statement at the time of effectiveness is often referred to as the Section 11 file.
Section 12 imposes liability on certain sellers who sell securities using a prospectus or other communication that includes material misstatements or omissions. Section 12 liability is based on the totality of what investors have been told, oral or written, at the time the underwriters confirm orders. This full suite of information – including free writing prospectuses (FWPs), oral communications, and any amended registration statements or post-effective amendments at the time of confirming orders – is often referred to as the Section 12 file.
While this distinction may seem like something to be left to litigators, it is important to understand how the materiality analysis under Rule 430A impacts the need for additional disclosures to be made to investors prior to confirming orders. As discussed above, Rule 430A and the 20% safe harbor allow pricing information disclosed after effectiveness in the Final Prospectus to retroactively be deemed a part of the registration statement at effectiveness, i.e., the Section 11 file. It does not, however, address the Section 12 file, since the Final Prospectus is typically filed after confirming orders. This means that while Rule 430A may help to prevent liability under Section 11, you still have to consider whether a post-effective change in deal size or pricing terms, and any related material impacts to other prospectus disclosure, would have to be conveyed to investors for purposes of confirming orders in order to avoid liability under Section 12.
This situation often arises when there is a change in pricing terms that technically fits within Rule 430A’s 20% safe harbor that nonetheless may result in a material misstatement or omission in other parts of the Preliminary Prospectus. For instance, a change that fits within the 20% safe harbor might still be material if it materially impacts the company’s use of proceeds, or its ability to achieve key business or strategic objectives or capital resources and liquidity. In such a scenario, filing a Final Prospectus with this additional disclosure would satisfy Section 11 under Rule 430A, but you would still need to convey this change to investors – before any orders are confirmed – as part of the entire package of information for Section 12 purposes. If the change is simple enough, you could convey this orally to investors through your underwriters. For more complicated changes, you would need to file a FWP that is delivered to investors prior to confirming orders. For even more pervasive changes, a revised preliminary prospectus may be required. These latter options may impact the timing and certainty of your IPO.
One way to get ahead of the Section 12 materiality issue, and to minimize the need for additional disclosure at pricing, is to use if/then scenarios in your use of proceeds and to include detailed sensitivity analyses when drafting your registration statement. These types of disclosures are often included in the price range prospectus in order to inform investors about the effects of a potential upsize or downsize on certain critical disclosures, such as use of proceeds and pro forma equity capitalization. All of these considerations – whether something is material or not, whether conveying information orally is sufficient or whether a written communication is required, and whether the sensitivity analysis in the price range prospectus is sufficient disclosure for liability purposes – are all fact-specific determinations and will take careful coordination with the underwriters and other offering participants to determine their level of comfort with the disclosures provided and approach taken with respect to pricing changes.
Rule 457: The decision on calculating filing fees
When do you need to pay additional filing fees with the SEC in connection with your adjusted deal size?
If upsizing, you may owe more money to the SEC. Whether you do or not may depend on which method you used to calculate the filing fee. There are two ways to calculate the filing fees in the registration statement for your IPO:
- Rule 457(a). Under Rule 457(a), you calculate your filing fee based on the number of shares to be sold in the offering (including the greenshoe) and the high end of your preliminary per-share price range (i.e., the PMAOP).
- Rule 457(o). Under Rule 457(o), you calculate your filing fee based on the total amount of proceeds you want to raise.
Generally, when you first file your registration statement publicly, you will have opted to use Rule 457(o). This is because 457(o) can avoid signaling to the market your anticipated price per share. However, when it comes to filing your registration statement with your Preliminary Prospectus, you may choose to change the method of calculation to 457(a) or continue using 457(o). Again, there are different rules and C&DIs at play here, so we’ve put together another high-level summary:
| Rule | How is the filing fee calculated? | When are additional filing fees required? | Use this rule if … |
| 457(a) | Under Rule 457(a), you calculate your filing fee based on the number of shares to be sold in the offering (including the greenshoe) and the high end of your preliminary per-share price range (i.e., the PMAOP). | If the number of shares offered increases, you must register those additional shares (and pay corresponding additional filing fees). No additional filing fees apply if you are only increasing the price and not increasing the number of shares being offered. | You have a hot IPO and expect to increase the price per share. You’ll be able to increase the price per share as much as you want without filing an additional registration statement. But keep in mind any potential materiality issues under 430A. |
| 457(o) | Under Rule 457(o), you calculate your filing fee based on total deal size (e.g., the total amount you want to raise). | If the maximum offering size increases, you must register the additional offering size (and pay corresponding additional filing fees). There is no need to pay additional filing fees as long as the offering size remains the same (i.e., can increase share price/decrease share count and vice versa). See C&DI 640.05. | There is a chance you’ll need to decrease the price per share. You can still increase the number of shares offered, but as long as the offering size stays the same, you won’t need to file an additional registration statement. |
Rule 462(b): An immediately effective registration statement used to register the upsize and pay the additional filing fees with the SEC
Once your registration statement has been declared effective by the SEC, if you are required to pay additional filing fees pursuant to Rule 457(a) or 457(o), you would have to file a new registration statement covering the increase. This is typically accomplished through the filing of an immediately effective short-form registration statement under Rule 462(b) (a Rule 462(b) registration statement).
Specifically, a Rule 462(b) registration statement would be required if:
- You calculated your filing fee using Rule 457(a) and there is an increase in the number of shares being offered.
- You calculated your filing fee using Rule 457(o) and there is an increase in the maximum aggregate offering amount.
While Rule 462(b) registration statements are short and straightforward, you’ll want to tee up some procedural points in advance of pricing if you think an upsize is possible. These points include a filing consent from your auditors (and related management representation letters that the auditors may need for that consent) and an additional Exhibit 5 legal opinion from the issuer’s outside counsel covering the validity of the additional shares being registered. The Rule 462(b) registration statement is immediately effective upon filing with the SEC (meaning it will not require SEC review), so long as the filing is in compliance with the requirements of the rule. These requirements include:
- It is filed before orders are confirmed (for after-market pricings, this means you need to file before 10:00 pm Eastern time); and
- The increase in the number of shares and price is within 20% of the prior maximum aggregate offering price as disclosed at effectiveness.
This last point – the 20% cap for Rule 462(b) registration statements – is calculated differently based on whether you calculated the SEC filing fee under Rule 457(a) or Rule 457(o). This is why, if you think you’ll be upsizing your IPO, the decision as to which rule to use on your price range prospectus is such an important decision.
- When using Rule 457(a), you have to determine whether the number of additional shares multiplied by thenew offering price is within 20% of the aggregate deal size in the fee table at effectiveness. (See C&DI 640.03)
- When using Rule 457(o), you have to determine whether all of the shares being offered multiplied by the new offering price is within 20% of the aggregate deal size in the fee table at effectiveness.
This 20% cap for purposes of the Rule 462(b) registration statement is different from the 20% safe harbor for purposes of Rule 430A. This is particularly important when using Rule 457(a), because while you might be within the 20% cap allowing you to use a Rule 462(b) registration statement to register additional shares, you might nonetheless fall outside of the 20% safe harbor for Rule 430A, which is calculated based on all shares. As a result, depending on the materiality of the pricing change, you may still fall outside the Rule 430A 20% safe harbor and would need to consider additional disclosure and related SEC filings, in addition to the Rule 462(b) registration statement.
Appendix 1: Sample calculations
Here are some sample calculations to illustrate how to calculate whether you fall within the 20% safe harbor described above. These examples are based on the following preliminary pricing information:
- Price range of $16 – $18 per share
- 10,000,000 firm commitment shares
- 1,500,000 greenshoe shares
- PMAOP on registration statement = $207,000,000 (18 * (10,000,000 + 1,500,000))
Upsize/downsize calculations:
- Maximum upsize calculation = $248,400,000 (207,000,000 * 120%)
- Maximum downsize calculation = $124,000,000 (16 * 10,000,000) – (18 * 10,000,000 * 20%)
The following chart illustrates potential upsize/downsize scenarios and the additional filings that may be required:
| Price | Number of shares | Aggregate offering size | Within 20% safe harbor under Rule 430A? | Additional filing required? (assumes no other material changes) | |
| Scenario 1 | Increases to $19 per share | No change (including greenshoe) | $218.5 million | Yes | No, if Rule 457(a) used on fee table. If Rule 457(o) used on fee table, you would need to file a Rule 462(b) registration statement. Consider if additional disclosures are needed to round out the Section 12 package. |
| Scenario 2 | Increases to $20 per share | Total (including greenshoe) increases to 13,570,000 shares | $271.4 million | No, exceeds 120% of PMAOP | Yes, you need to file a Rule 462(b) registration statement post-effectiveness. If change is considered material, you may need to file a free writing prospectus (FWP) or registration statement amendment. |
| Scenario 3 | Decreases to $14 per share | No change (excluding greenshoe) | $140 million | Yes | No |
| Scenario 4 | Decreases to $13 per share | Total decreased to 10,969,231 shares (including greenshoe) to maintain minimum offering size within the preliminary range | $142.6 million | Yes | No |
Appendix 2: Key definitions
Item 501(b)(3)
Instructions to paragraph 501(b)(3): 1. If a preliminary prospectus is circulated and you are not subject to the reporting requirements of Section 13(a) or 15(d) of the Exchange Act, provide, as applicable:
(A) A bona fide estimate of the range of the maximum offering price and the maximum number of securities offered; or
(B) A bona fide estimate of the principal amount of the debt securities offered.
Rule 430A
§ 230.430A Prospectus in a registration statement at the time of effectiveness.
(a) The form of prospectus filed as part of a registration statement that is declared effective may omit information with respect to the public offering price, underwriting syndicate (including any material relationships between the registrant and underwriters not named therein), underwriting discounts or commissions, discounts or commissions to dealers, amount of proceeds, conversion rates, call prices and other items dependent upon the offering price, delivery dates, and terms of the securities dependent upon the offering date; and such form of prospectus need not contain such information in order for the registration statement to meet the requirements of Section 7 of the Securities Act (15 USC 77g) for the purposes of Section 5 thereof (15 USC 77e), provided that:
(1) The securities to be registered are offered for cash;
(2) The registrant furnishes the undertakings required by § 229.512(i) of this chapter (Item 512(i) of Regulation S-K), or the undertakings required by Item 34.4 of Form N-2 (§§ 239.14 and 274.11a-1 of this chapter); and
(3) The information omitted in reliance upon paragraph (a) from the form of prospectus filed as part of a registration statement that is declared effective is contained in a form of prospectus filed with the Commission pursuant to Rule 424(b) or Rule 497(h) under the Securities Act (§§ 230.424(b) or 230.497(h) of this chapter); except that if such form of prospectus is not so filed by the later of fifteen business days after the effective date of the registration statement or fifteen business days after the effectiveness of a post-effective amendment thereto that contains a form of prospectus, or transmitted by a means reasonably calculated to result in filing with the Commission by that date, the information omitted in reliance upon paragraph (a) must be contained in an effective post-effective amendment to the registration statement.
Instruction to paragraph (a): A decrease in the volume of securities offered or change in the bona fide estimate of the maximum offering price range from that indicated in the form of prospectus filed as part of a registration statement that is declared effective may be disclosed in the form of prospectus filed with the Commission pursuant to § 230.424(b) or § 230.497(h) under the Securities Act so long as the decrease in the volume or change in the price range would not materially change the disclosure contained in the registration statement at effectiveness. Notwithstanding the foregoing, any increase or decrease in volume (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b)(1) (§ 230.424(b)(1)) or Rule 497(h) (§ 230.497(h)) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.
Rule 457(a)
§ 230.457 Computation of fee.
(a) If a filing fee based on a bona fide estimate of the maximum offering price, computed in accordance with this rule where applicable, has been paid, no additional filing fee shall be required as a result of changes in the proposed offering price. If the number of shares or other units of securities, or the principal amount of debt securities to be offered is increased by an amendment filed prior to the effective date of the registration statement, an additional filing fee, computed on the basis of the offering price of the additional securities, shall be paid. There will be no refund once the statement is filed.
Rule 457(o)
§ 230.457 Computation of fee.
(o) Where an issuer registers an offering of securities, the registration fee may be calculated on the basis of the maximum aggregate offering price of all the securities listed in the “Calculation of Registration Fee” table. The number of shares or units of securities need not be included in the “Calculation of Registration Fee” Table. If the maximum aggregate offering price increases prior to the effective date of the registration statement, a pre-effective amendment must be filed to increase the maximum dollar value being registered and the additional filing fee shall be paid.
Rule 462(b)
(b) A registration statement and any post-effective amendment thereto shall become effective upon filing with the Commission if:
(1) The registration statement is for registering additional securities of the same class(es) as were included in an earlier registration statement for the same offering and declared effective by the Commission;
(2) The new registration statement is filed prior to the time confirmations are sent or given; and
(3) The new registration statement registers additional securities in an amount and at a price that together represent no more than 20% of the maximum aggregate offering price set forth for each class of securities in the “Calculation of Registration Fee” table contained in such earlier registration statement.
SEC C&DI Question 227.03
Question: A registrant omits pricing information from the prospectus in a registration statement at the time of effectiveness in reliance on Rule 430A. Is it required to reflect pricing information or the inclusion of additional securities in a post-effective amendment?
Answer: The second sentence of the Instruction to Rule 430A provides that a Rule 424(b) prospectus supplement may be used, rather than a post-effective amendment, when the 20% threshold is not exceeded, regardless of the materiality or non-materiality of resulting changes to the registration statement disclosure that would be contained in the Rule 424(b) prospectus supplement. When there is a change in offering size or deviation from the price range beyond the 20% threshold noted in the second sentence of the Instruction, a post-effective amendment would be required only if such change or deviation materially changes the previous disclosure. Regardless of the size of the increase, in the case of a registration statement that is not an automatic shelf registration statement, a new registration statement must be filed to register any additional securities that are offered. Additional securities cannot be registered by post-effective amendment except on automatic shelf registration statements. [Jan. 26, 2009]
SEC C&DI Question 627.01
The instruction to paragraph (a) of Rule 430A provides that changes in volume and price representing no more than a 20% change in the maximum offering price set forth in the registration statement fee table may be made pursuant to a Rule 424(b)(1) prospectus supplement. The 20% threshold may be calculated using the high end of the range in the prospectus at the time of effectiveness and may be measured from either the high end (in the case of an increase in the offering price) or low end (in the case of a decrease in the offering price) of that range. [Apr. 24, 2009]
SEC C&DI Question 640.03
A registration statement for 1,000,000 shares of preferred stock went effective with an estimated offering price of $15 per share. The fee was calculated and paid in reliance on Rule 457(a). After the effective date, but prior to the commencement of sales, the registrant sought to increase the number of shares to 1,150,000 and increase the offering price to $17.50 per share. Because more shares are going to be sold than were registered, the registrant must file a new registration statement to register the additional 150,000 shares at $17.50 per share. A short-form registration statement under Rule 462(b) would be possible since the number of additional shares (150,000) times the new price ($17.50) is less than 20% of the aggregate dollar amount in the calculation of registration fee table in the original effective registration statement ($15,000,000); provided, however, that no confirmations may be sent prior to the filing of the Rule 462(b) registration statement. [Jan. 26, 2009]
SEC C&DI Question 640.05
640.05 A registration statement went effective registering $15,000,000 of preferred stock under Rule 457(o). The prospectus indicated that 1,000,000 shares were being offered. After the effective date, but prior to the commencement of sales, the registrant sought to increase the number of shares in the offering to 1,300,000 and decrease the price from the intended $15 to $11.50. Because the new aggregate offering amount (1,300,000 x $11.50) does not exceed the $15,000,000 registered, no new registration statement need be filed. [Jan. 26, 2009]
[1] See Appendix 2 for a list of all rules, regulations, and C&DIs that are referenced in this handbook.
