The banker bake-off is complete, the org meeting is behind you, and all that’s standing between you and your IPO is … well, a lot, not least of which is the registration statement on Form S-1 that has to be submitted to, filed with and declared effective by the Securities and Exchange Commission (SEC). Drafting the S-1 can be a daunting process, and SEC review can take time and potentially delay your IPO. To help you get ahead of the drafting process, we’ve laid out some common pitfalls in drafting a Form S-1 and noted how “Lazy Susan” (our fictional company created as part of our IPO GO tool) can help you avoid them.
Pitfall 1: Illustrating growth potential
As we noted above, an IPO registration statement is a balancing act between disclosure and marketing. On the marketing side, you want your IPO to spur public market interest and enthusiasm, and you want investors to invest in your IPO and in your company over the long term. A big component of this is your “equity story.” This includes how your business differs from competitors, what’s behind your company’s success, and why and how your company has been, or is going to be, successful. Investors are always looking for a great growth story, and you can use the registration statement to discuss the company’s strategy, pipeline, and short-term, mid-term and long-term growth drivers. The goal is to convey what the company is doing to capitalize on the market opportunity now and in the future.
Of course, at no point should there be any material misstatements or misleading omissions. You also must be careful to avoid exaggerations, hyperbole or unreasonable expectations that might give investors the wrong impression. After all, not only must the disclosure be reviewed and ultimately blessed by the Staff before the registration statement is declared effective, but once disclosure about the company is published, you will be subject to continued scrutiny from regulators and investors over the reliability of those disclosures. Note that it is generally advisable to avoid frequently altering the scope or depth of that disclosure, especially in the near term, without an intervening cause or other good reason. For example, if the company provides a certain level of detail, key metrics or a breakdown of each business segment in its IPO prospectus, it should try to maintain the same level of disclosure in future filings. Otherwise, unnecessary skepticism may arise, which can negatively affect the stock price.
Things like total addressable market (TAM) and serviceable available market (SAM) in the registration statement are often used as a measure of disclosing growth potential. The SEC will review these estimates to ensure that companies are being reasonable in their approach. These figures are meant to convey the size and scope of the addressable market relevant to the company and how the company’s management is approaching it. How you discuss the opportunity should align with the company’s growth strategy. The company should include detailed discussion leading up to the company’s estimation of the TAM, with supporting facts and analyses, and provide the sources. The underwriters are highly focused on this topic, as this is a critical assumption of the equity story that they will need to sell in the marketplace, particularly to buy-side institutional investors, who are well-versed in industry trends. Any unsubstantiated claims or poor logic used in arriving at the estimation of TAM will not go unpunished in the marketplace and can – in the worst case – irrevocably damage the company’s reputation. As a late-stage private company, a pre-IPO company will want to fine-tune their disclosure controls and procedures to ensure that their cross-functional communications and disclosure review process don’t let anything fall through the cracks.
Different sections of the registration statement serve different purposes. Some sections may serve more of a marketing role, and others serve to present factual information about the company’s operations and financial results. In the drafting guide, we’ll go through each of these sections and walk you through where you should be more conservative, where you should be more neutral and where you should put on your best marketing hats.
Pitfall 2: Understated or missing risk disclosures
One section of the registration statement that will be pored over not only by the underwriters and potential investors but also by the SEC Staff and the plaintiff’s bar is the “Risk Factors” section. This section, unlike those sections where you get to tell your equity story, falls more firmly within the “disclosure” role of the registration statement. The Staff has noted shortcomings in risk factors that drew comments, making suggestions such as the following:
- Each subheading should clearly and concisely identify a risk.
- Do not discuss multiple risks under one subheading; each subheading should discuss one risk.
- Avoid overly generic risk factor discussions that do not describe how a specific risk applies to the company or offering (if necessary, disclose them at the end of the “Risk Factors” section under the caption “General Risk Factors”).
- Set out the extent of each risk plainly and directly, and avoid statements that there is or can be no assurance of a particular outcome.
While Item 105 of Regulation S-K requires a discussion of the “material factors” that make an investment in the issuer or offering speculative or risky, what constitutes the “material factors” has grown, and “Risk Factors” sections have become increasingly longer over time. Microsoft’s IPO registration statement, back in 1986, had a mere page and a half of risk factors. When Meta went public in 2012, its “Risk Factors” section came in at 22 pages. Last year, Tempus AI went public with 75 pages of risk factors. This section, in fact, has gotten so hefty that in 2020 the SEC began to require companies to include a TLDR-style summary of risk factors of no more than two pages before the actual “Risk Factors” section. Although technically the summary of risk factors is required only for filings where the risk factors exceed 15 pages, you should expect that an IPO prospectus will exceed 15 pages. The added length of “Risk Factors” sections reflects new technologies of modern businesses and their corresponding risks – things like cybersecurity, digital privacy and artificial intelligence (AI) that simply weren’t risks demanding real estate on a prospectus in the ’80s – but also signals the SEC’s view that all of these considerations are now relevant for investors in making investment decisions. It’s an interesting balancing act, since you don’t want to scare off potential investors with an unduly long list of risks, but you also can’t mislead investors by making it look like an investment in your company is completely risk-free (which may possibly be the quickest way to get sued by your investors post-IPO).
It’s important for companies to approach risk factor disclosure as a dynamic process that evolves with changes in the business landscape. Investors, in turn, should carefully review these risk factors as part of their due diligence process before making investment decisions. Because we want to emphasize how bespoke your “Risk Factors” section will be for your IPO, we don’t include sample risk factors for Lazy Susan. However, we go into detail about how to approach risk factor disclosures and draft them in a way to avoid comments to this section in our IPO GO drafting guide.
Pitfall 3: Inconsistent financial reporting adjustments
Whether it’s your first S-1 filing or your fifth, financial statement requirements can be complicated and not entirely intuitive. Financial reporting requires close coordination with multiple members of your IPO advisory team, including your lawyers, accountants, and in-house legal and finance teams, to pull it all together. There are any number of issues that may arise in relation to financial statements – including segmentation, consistency across periods, timing of review (and age of your financials), key performance indicators and adjusted metrics, just to name a few. There’s also the question of whether you’ll need to include predecessor financial statements or carve-out financials, depending on the sorts of transactions that occurred prior to your IPO, and, for emerging growth companies (EGCs), whether to take advantage of the various benefits afforded to EGCs – such as having to provide only two years of audited financials instead of three.
You may hear us recommending to late-stage private companies gearing up for an IPO to assess their annual and quarterly financial statement closing timeline readiness and begin preparing their audited financial statements as early as possible. The financial statements included in the Form S-1 registration statement must adhere to strict accounting principles and disclosure requirements, and not having them public company-ready can be a source of delay for the IPO. Not only will audited financial statements (and any required acquired company financials) be needed in order to confidentially submit a draft registration statement to the SEC, but also, the accountants will have to provide comfort on all financial information ultimately included in the final prospectus.
The inclusion of non-GAAP financial measures also tends to be a sticking point for IPO registration statements. The financial statements presented in the Form S-1 registration statement must comply with US generally accepted accounting principles (GAAP), though many companies find that financial indicators outside of US GAAP, such as earnings before interest, taxes, depreciation and amortization (EBITDA), adjusted EBITDA or free cash flow, are just as important in telling the company’s financial story. Non-GAAP financial measures are allowed to supplement financial statements, so long as they comply with several rules, including Regulation G and Item 10(e) of Regulation S-K , as well as the various compliance and disclosure interpretations (C&DIs) issued by the SEC’s Division of Corporation Finance. Non-GAAP financial measures cannot be presented in ways that are misleading, nor can they be given greater prominence than GAAP measures. Reconciling GAAP and non-GAAP figures can be time-consuming and tricky, and financial reporting inconsistencies can not only invite SEC scrutiny and delay the filing process, but also confuse investors. It’s not just about having accurate numbers – it’s about telling a clear, unified financial story.
Pitfall 4: Overly technical language (jargon)
In the context of an IPO, the registration statement on Form S-1 serves a dual purpose: disclosure and marketing. The registration statement must meet very specific disclosure requirements as set out in the Form S-1, Regulation S-K and Regulation S-X. It will be reviewed closely by the SEC and will go through multiple rounds of comments from the SEC Staff. According to a Deloitte report that reviewed a randomly selected sample of 50 IPOs completed within the 12-month period ended July 31, 2024, the average number of comments issued during initial review was 22. Typically, the more complex the business, the higher the number of comments.
This balancing act – between disclosure and marketing – is at the heart of good registration statement drafting. As a marketing document, you’ll want the registration statement to be clear and easy to read and understand. It’s also a statutory requirement. Rule 421(d) of the Securities Act of 1933, as amended (Securities Act), requires all information in prospectuses to be presented in “plain English.” Specifically, the rule requires information to be presented “in a clear, concise and understandable manner,” and “[w]henever possible, use short, explanatory sentences and bullet lists.” The rule also requires you to avoid legal and highly technical business terminology. Rule 421 notes the following “plain English writing principles:”
- Short sentences.
- Definite, concrete, everyday words.
- Active voice.
- Tabular presentation or bullet lists for complex material, whenever possible.
- No legal jargon or highly technical business terms.
- No multiple negatives.
Failure to write in “plain English” can result in the SEC Staff providing comments requesting you to “revise to explain industry jargon to an investor not in your business,” or “revise your disclosure to provide context for these terms so a reader not familiar with your industry can understand your use of these terms.” Filing a registration statement that avoids overly technical language and industry jargon and that is written in a way that is easy to follow can help to prevent this comment and avoid having to review and rewrite the prospectus.
We’ll be honest here: We can’t guarantee the Staff wouldn’t give Lazy Susan a comment about plain English language in the draft S-1 up on IPO GO. We encourage you to read it for yourself and see.
Pitfall 5: Evolving SEC compliance needs
While we saw a handful of companies in both tech and life sciences go public in 2024, the more telling measure may be the activity that happened on the sidelines. It’s possible that late-stage private companies prepared for, but ultimately delayed, their IPOs until they received some post-election clarity on regulatory headwinds (or tailwinds). The regulatory landscape can impact not only the timing of the IPO itself, but the types of disclosure required in registration statements once the IPO is in progress, since the Staff has been known to request expanded disclosures on the actual and potential impact of emerging issues. In the past year, these “emerging” issues have included supply-chain disruptions, inflation, interest rates, climate change, Russia’s invasion of Ukraine and operating in China.
The SEC, under former Chair Gary Gensler, implemented many rules with the aim of protecting investors and increasing transparency in the capital markets. Such rules included topics like cybersecurity and privacy, environmental, social and governance (ESG), climate and human capital, and AI. Terms such as “green-washing” and “AI-washing” are recent developments, and show the ways the SEC scrutinizes statements made during the course of an IPO to ensure that companies do not make unsupported or misleading statements about their capabilities or prospects. We saw a number of AI-washing enforcement actions announced in 2024, and the SEC has issued comments to S-1 registration statements regarding statements made about the company’s use of AI. Moreover, such scrutiny will continue past a company’s IPO and remain as a company matures as a public company. While companies can and should include disclosure about their capabilities regarding digital technologies, including AI, they should be sure to have factual back-up and other support for all factual statements made in their registration statements. This includes statements made not only in the “Business” section of the registration statement, but also in “Risk Factors,” “Management’s Discussion and Analysis” and other sections.
With the new administration, we expect these regulatory regimes will loosen a bit, including a reversal on the SEC’s climate rules, which we do not expect to be implemented (although there may still be requirements under state law and European guidelines). Nonetheless, it may be worth including disclosure of your efforts toward sustainability and governance, even if not required by law, especially if those things are important to you. The temperature on diversity, equity and inclusion (DEI) also is fluctuating, and Cooley’s ESG advisory and regulatory teams are keeping a close eye on all of these developments. We discuss these and other compliance areas in Lazy Susan, where these issues often come up.
“Special thank you to Lisa Cossi for their invaluable contributions to this piece.”
Considering going public? Start here. IPO GO breaks down the S-1 into digestible, annotated sections complete with sample language, drafting tips and real-world insights from Cooley. It’s the IPO resource we wished existed … so we built it.
