Market snapshot

Recent activity

How would you describe the general state of equity capital markets in your jurisdiction, including notable recent activity and deals?

US equity capital markets have been strong in 2018. According to Thomson Reuters, for the first nine months of 2018, proceeds from equity and equity-related offerings by US issuers were nearly 9% higher than the same period in 2017, totalling $181.9 billion. These offerings accounted for 31% of equity issuances globally – up from 27% for the first nine months of 2017. This research also indicates that during the first nine months of 2018, initial public offerings (IPOs) by US issuers reached the highest levels since 2014, with 128 IPOs totalling $29.9 billion in proceeds. The top industries for equity offerings during the period have been:

  • technology (20% of the market share);
  • healthcare (17%);
  • energy and power (14%); and
  • financials (13%).

The general strength of US equity offerings in 2018 can be attributed to a number of factors, including:

  • the bullish macroeconomy and US stock markets generally;
  • strong corporate earnings; and
  • high corporate cash balances.

Potential IPO issuers may also be accelerating their processes as US investors are anticipating a slowdown in the global economy. Offerings that have performed well recently have included those by issuers in rapidly growing markets and with proven management teams.

One particularly strong equity offering in 2018 was the $4.8 billion secondary equity offering of Hilton Worldwide Holdings Inc, the largest equity capital markets transaction during the first nine months of 2018. The largest IPO during the period was conducted by AXA Equitable Holdings Inc and raised $3.2 billion. Other strong performing offerings in 2018 included online survey company Survey Monkey, which opened 56% above its issue price, and ticketing platform Eventbrite, which opened 57% above its issue price.

Recognised exchanges

What recognised exchanges operate in your jurisdiction, and what are the pros and cons of listing in each?

The two main stock exchanges that account for most trading related to equity securities in the United States are the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (Nasdaq). When deciding on which exchange to list, issuers should consider the following:

  • Cost of listing – generally, the cost of listing and maintaining a listing on Nasdaq will be lower than on the NYSE. The initial listing fee for Nasdaq can range between $50,000 and $225,000 with a yearly listing fee of approximately $27,500. In comparison, the maximum initial listing fee for the NYSE is $295,000 with a yearly listing fee based on the number of shares listed, which is capped at $500,000.
  • Listing qualifications – both the NYSE and Nasdaq require issuers to meet minimum entry listing requirements, including with regard to:
    • profit history;
    • shareholders’ equity;
    • the size of the market capitalisation;
    • the number of expected shareholders and corporate governance; and
    • the minimum distribution and market value.

However, the specific standards are different for each exchange and for the three different markets within Nasdaq.

  • Corporate governance requirements – there are a few notable differences in the corporate governance requirements of the NYSE and Nasdaq with regard to the following:
    • Committee independence – smaller companies with smaller boards may find the Nasdaq standard to be more flexible because executive compensation and director-nominating decisions can be made by a majority of independent directors instead of independent committees.
    • Internal audit requirement – NYSE-listed companies must have an internal audit function while Nasdaq-listed companies need not meet this requirement.
    • Corporate governance guidelines – NYSE-listed companies must have corporate governance guidelines, while Nasdaq has no analogous requirement.
    • CEO certification and interim written affirmations – Nasdaq-listed companies must certify certain corporate governance standards only upon their initial listing, whereas NYSE-listed companies must make certifications at listing, annually and periodically following a change in the composition or independence of the board or any of its committees and certain other matters.
  • Size and reputation – due to its long history, the NYSE lists many of the big, blue chip companies in the United States, including Walmart and General Electric, and has $21.3 trillion in market capitalisation. Nasdaq was founded in 1971, lists a wider variety of companies in terms of size and has a total of $11 trillion in market capitalisation. Nasdaq is known for listing technology-focused companies such as Facebook, Google and Amazon, as well as smaller companies with a market capitalisation of $200 million or less.

Reforms and case law

Are any regulatory reforms envisaged or underway with regard to equity capital markets? Has there been any recent case law affecting the markets?

Over the past six years there have been a number of regulatory reforms – some of which have been prompted by federal legislation – that aim to facilitate equity capital raising in offerings which are not subject to registration with the Securities and Exchange Commission (SEC). These include reforms to the following:

  • Advertised private placements – the SEC eliminated the longstanding prohibition on advertising in private placements, subject to the issuer satisfying heightened standards for verifying the accredited nature of purchasers.
  • Crowdfunding – the SEC adopted rules to facilitate online crowdfunding by private companies or smaller offerings through brokers or online portals that are exempt from SEC registration if certain conditions are met (eg, a cap of $1 million on the aggregate dollar amount raised over 12 months and relatively low caps on the amount that an individual can invest). Issuers using the crowdfunding rules must comply with limited SEC reporting requirements after the offering.
  • Regulation A+ – the SEC has had longstanding rules, referred to as Regulation A, permitting issuers of small public offerings to file a disclosure document with the SEC that is less burdensome than a complete registration statement. The SEC expanded these rules to include larger offerings (up to $50 million) subject to certain conditions, including expanded disclosure obligations (although these remain lighter than under normal registration) and post-offering SEC reporting obligations.

Although the new rules have not been widely used to date, and SEC-registered offerings and non-advertised private placements to accredited investors continue to account for most US equity capital raising, it is too soon to tell whether the market will develop greater comfort with these options. As regulators continue to look for ways to facilitate capital raising, it is likely that changes to these rules or new rules may be implemented in coming years.

Tech developments

Have there been any notable recent developments in financial technology (fintech) which affect equity capital markets in your jurisdiction?

Significant advances in artificial intelligence (AI), machine learning and alternative trading systems are fundamentally changing the way in which equity capital markets function in the United States.

AI is being used to analyse enormous volumes of information and make automated equities trading decisions at speeds well beyond human capacity. In turn, machine learning creates new trading strategies for equity securities based on statistical data analysis and can continuously update and improve these strategies as new information is obtained. Together, AI and machine learning are being implemented to select equity security investments and manage equity portfolios and risk profiles.

Data-driven processes can:

  • remove bias;
  • improve liquidity destinations;
  • reduce trading inefficiencies;
  • improve order strategy; and
  • improve order routing.

Alternative trading systems are proving to be viable competitors to traditional exchanges by offering new variations and capabilities for equities securities trading. These systems may offer different:

  • order-matching processes;
  • liquidity options; and
  • levels of protection from predatory trading strategies implemented by competitors.

Regulatory framework


What primary and secondary legislation governs the issue and trade of equity securities in your jurisdiction?

The primary legislation governing the US equity capital markets are the Securities Act of 1933 and the Exchange Act of 1934.

The Securities Act and related rules govern offerings of securities and require that every offering of securities be registered with the Securities and Exchange Commission (SEC) unless the offering is exempt. SEC registration generally requires the issuer to file a registration statement, which is a disclosure document that must include extensive information about the offering and the issuer, including audited financial statements. The prospectus that is part of the registration statement is the primary offering document in an SEC-registered offering. The Securities Act assigns liability to the issuer, its board, the officers signing the registration statement and any underwriter in the offering for misstatements or omissions in the registration statement. There are a number of exemptions to SEC registration, most notably the private placement exemption.

Under the Exchange Act, companies that are considered public companies (eg, companies listed on a stock exchange) must file regular disclosure reports with the SEC that are publicly available to all investors. These reports include:

  • annual reports with audited financial statements;
  • quarterly reports with unaudited financial statements; and
  • current reports that are required for specified material events.

The Exchange Act assigns liability to the issuer for misstatements or omissions in these reports. The act and related rules also impose various requirements on broker-dealers and stock exchanges.


Which authorities regulate equity capital markets in your jurisdiction and what is the extent of their powers?

The SEC is the primary federal regulator of the US equity capital markets. The extent of the SEC’s powers with respect to equity offerings is generally limited to requiring appropriate disclosure and issuing civil penalties, including fines, for violations of federal securities laws. The SEC generally does not have the authority to prohibit an offering of equity securities based on the merits of the investment. However, the SEC has broader authority over broker-dealers, mutual funds and other investment companies.

State securities regulators may also have jurisdiction over certain equity offerings, but most of their authority – including with respect to listed securities and private placements – has been pre-empted by federal law. For issuers with listed securities, the applicable stock exchanges regulate issuer disclosure, governance and other matters. Lastly, the Financial Industry Regulatory Authority has extensive authority over broker-dealers.



What eligibility and disclosure requirements apply for primary listing of equity securities on recognised exchanges in your jurisdiction (eg, aggregate share value, free float requirements, trading record, working capital)?

While the specific listing standards vary depending on the securities exchange, exchanges typically require a company to meet one or more financial standards, including:

  • a minimum adjusted pre-tax income or minimum cash flows for the prior two to three years;
  • a minimum revenue in the previous year;
  • a minimum market capitalisation;
  • a minimum shareholders’ equity (taking into account securities issued in the offering); and
  • a minimum market value of publicly held equity securities.

An issuer must also meet certain liquidity standards, which may include:

  • a minimum number of shareholders;
  • a minimum number of shares held by the public; and
  • a minimum per share price.

An issuer is also required to have certain governance features in place at the time of listing or, with respect to certain features, within a certain period after listing, including:

  • a board consisting of a majority of independent directors or trustees;
  • a committee of the board consisting of independent directors or trustees responsible for audit functions; and
  • independent directors or committees responsible for executive compensation and director nominations.

At the time of listing, national exchanges will also require the issuer to post its governing documents – including charters of board committees – on its corporate website. Each exchange has ongoing listing standards and rules that issuers must comply with, including requirements to disclose certain corporate events to the New York Stock Exchange (NYSE) or to shareholders.


Are there any exemptions from the listing requirements?

The NYSE and the National Association of Securities Dealers Automated Quotations (Nasdaq) have certain requirements that must be met, although there are limited exceptions to some requirements. For example, while the NYSE and Nasdaq do not generally provide exceptions to their financial standards, Nasdaq offers three different US markets – the Nasdaq Global Select Market, the Nasdaq Global Market and the Nasdaq Capital Market – which have different minimum financial standards requirements. The Nasdaq Global Select Market requires the highest initial listing requirements.

National securities exchanges offer exemptions from, and phase-in periods for, some of their corporate governance requirements. For example, issuers in an initial public offering (IPO) may have up to one year to attain a majority of independent directors or trustees and may take advantage of a phase-in period in which the issuer will attain board committees consisting of independent directors or trustees. In addition, a controlled company (ie, a company in which more than 50% of the voting power to elect directors is held by an individual, group or another company) and foreign private issuers (ie, certain non-US companies) following the relevant rules of their home countries need not comply with certain corporate governance requirements.

Procedure and timeframe

What is the procedure and typical timeframe for listing?

The listing process typically includes the following stages:

  • The issuer contacts the exchange’s listing department.
  • The issuer selects and reserves a stock exchange symbol for the security.
  • After review of certain limited company materials, the exchange issues a clearance letter to the issuer permitting it to submit a listing application.
  • The issuer provides draft corporate documents and governance information, and submits the initial listing application or agreement to the exchange.
  • The exchange begins or continues to review the documents.
  • The issuer completes and submits the final governance documents and certifications, certifications from the underwriters and other ancillary documents, and may select a market maker for the security.
  • The issuer makes certain filings with the Securities and Exchange Commission (SEC) in connection with the offering of the securities.
  • The exchange approves the listing.
  • The issuer provides any additional documents that the exchange requests after the listing date.

While timings vary, the listing process typically takes four to six weeks.


What fees apply for an application to list equity securities?

Typically, exchanges charge an initial listing fee followed by an annual fee based on the number of shares to be listed. The NYSE’s initial listing fees range from $150,000 to $295,000, subject to exceptions. Nasdaq fees range from $50,000 to $225,000 depending on the specific market. Once an issuer has a class of securities listed on the NYSE, the NYSE will charge a limited amount for a supplemental listing application, starting at $10,000. Nasdaq does not charge an application fee for listing additional shares.

Listing versus admission to trading

Is there a distinction between listing and admission to trading in your jurisdiction?


Secondary listing

Are there any differences in the rules, restrictions and procedures for secondary listings of equity securities?

The listing of additional shares of the same class of securities is generally much simpler than the initial listing. Because exchanges require issuers to maintain certain financial and governance standards and to notify the exchange of the failure to meet some of these standards, and because issuers also have disclosure obligations under US securities laws, exchanges do not typically require issuers to provide the detailed financial and governance information required in an initial listing application. National exchanges typically require the issuer to submit only:

  • a short, one to two-page application;
  • copies of the offering documents; and
  • certain ancillary documents (including possibly a legal opinion regarding the validity of the shares being listed).

The exchanges typically approve these applications within a few days.

Foreign issuers

Are there any differences in the listing rules and procedures for foreign issuers?

Although the general procedures for listing on an exchange are the same for US and non-US issuers, the listing standards differ. Non-US issuers must meet one or more of the financial standards similar to those of US issuers; however, the specific minimum thresholds may differ for non-US issuers and may, in some respects, be higher.

An issuer generally is required to have certain governance features in place at the time of listing or, with respect to certain features, within a certain period after listing, including:

  • a board consisting of a majority of independent directors or trustees;
  • a committee of the board consisting of independent directors or trustees responsible for audit functions; and
  • independent directors or committees responsible for executive compensation and the nomination of directors or trustees.

Exemptions from certain corporate governance requirements are available for some non-US issuers that instead follow the relevant rules of their home country.


Under what circumstances can a company be delisted? What rules and procedures apply?

An exchange will consider suspending trading and delisting a company that fails to meet the minimum quantitative thresholds, including if:

  • the company fails to maintain a minimum number of shareholders or average monthly trading volume;
  • the global market capitalisation falls below a minimum threshold over a 30-trading day period;
  • the average closing price per share is below a set minimum (eg, $1 over a 30-trading day period); or
  • the company fails to comply with other listing requirements, such as the corporate governance requirements.

For example, the NYSE will promptly initiate the suspension and delisting of a company if the company’s average global market capitalisation over a 30-trading day period is less than $15 million.

The delisting process begins with the exchange notifying the issuer of non-compliance and can result in immediate delisting. For example, Nasdaq will immediately delist a company that fails to solicit proxies and hold an annual shareholder meeting in a timely manner. For non-compliance that does not require immediate delisting, the company will have an opportunity to submit a compliance plan to the exchange. For example, if the potential delisting is due to the company failing to file periodic reports with the SEC or failing to have a majority independent board or independent committees of the board, a compliance plan may be established. The company must disclose in a filing with the SEC that it has received the non-compliance notice from the exchange. The exchange will review the proposed compliance plan and may delist the company or issue a public reprimand letter.

Initial public offerings


What are the most common structures used for IPOs in your jurisdiction, and what are the advantages and disadvantages of each?

A US initial public offering (IPO) involves the issuer’s distribution of shares to public investors through underwriters. Unlike IPOs in other jurisdictions, a US IPO may be completed without listing the company’s shares on a stock exchange – although most IPO companies list their shares at the time of their initial public distribution. An exchange‑listed IPO is advantageous, since it:

  • can be sold to a much larger group of prospective investors;
  • offers stockholders greater liquidity in post‑IPO trading; and
  • affords investors the protection of corporate governance standards prescribed by the exchange rules.

Most US IPOs are distributed through a syndicate of investment banks in a firm commitment underwriting. Under this structure, underwriters – acting as principals – purchase shares from the company at a negotiated price net of the underwriting discount (approximately 7% of the price to the public) and then resell the shares to public investors at a price that reflects the amount of the discount. In a few IPOs, typically undertaken by smaller issuers, investment banks distribute shares on a ‘best efforts’ basis. Under this structure, the investment banks act as the company’s agents in soliciting investors, which purchase the shares from the company rather than the banks. The firm commitment structure offers advantages over the best efforts structure, including:

  • wider market acceptance;
  • better distribution; and
  • greater transaction certainty for the issuer.

Procedure and timeframe

What is the procedure and typical timeframe for launching an IPO?

A US IPO has three principal stages.

Pre-filing periodDuring the first stage, called the ‘pre‑filing period’:

  • the IPO issuer selects its underwriters;
  • the underwriters begin their due diligence investigation of the issuer;
  • the issuer, the underwriters and their respective advisers prepare the disclosure document to be used in the offering; and
  • the issuer begins any corporate restructuring required for it to offer shares and operate as a public company.

This stage typically takes three to six months to complete.

Waiting periodThe second stage, called the ‘waiting period’, begins when the issuer files the registration statement – which registers the IPO shares for public sale – with the SEC for review. During this stage:

  • the issuer amends the registration statement in response to SEC comments;
  • the underwriters complete their due diligence investigation; and
  • the issuer finalises its corporate restructuring plans.

After the SEC completes its review of the registration statement, the company and the underwriters value the company to determine the IPO price range for the offering and then market the IPO in a series of road show meetings with prospective investors. This stage typically takes 90 to 120 days to complete, assuming that market conditions are receptive for marketing the offering once the legal preparations have been completed.

Post-effective periodThe third stage, called the ‘post‑effective period’, begins after the road show when the SEC permits the issuer to sell its shares to the public by declaring the registration statement to be effective. The issuer and the underwriters then agree on the IPO price and sign the underwriting agreement governing the underwriters’ purchase of shares from the issuer and the resale of the shares to the public. The closing of the IPO and issuance of the IPO shares typically occurs two trading days later.

This last stage is completed in approximately one week. In some IPOs, there may be one or more subsequent closings within 30 days for the sale of overallotment shares (to cover the underwriters’ short position), which can total up to 15% of the number of shares sold in the initial closing.

Due diligence

What due diligence is required and advised in the IPO process?

IPO due diligence is intensive and covers business, financial, accounting and legal matters. Such due diligence is required in the IPO process to protect the offering participants from legal liability for damages for deficient disclosure in the registration statement. All of the issuer’s directors, the issuer’s executive officers who sign the registration statement, the issuer’s auditor and the underwriters can be held liable for materially false or misleading disclosure, unless they can establish a due diligence defence. ‘Due diligence’ refers to a reasonable investigation that provides a basis for believing that the registration statement is not materially false or misleading. Although the issuer is strictly liable for any deficient disclosure – and therefore has no due diligence defence – effective due diligence also can protect the issuer from liability by ensuring the material accuracy and completeness of the disclosure provided to investors. The underwriters and their counsel organise and lead the IPO due diligence process. 

Pricing and allocation

What rules and standards govern share pricing and allocation in the context of an IPO?

The preliminary IPO share price range used to market an IPO is determined by negotiations between the issuer and the underwriters based on:

  • valuations of comparable public companies;
  • other customary valuation methodologies; and
  • an estimate of the strength of investor demand for the new share issue.

The issuer and the underwriters determine the final IPO price to the public based on investor orders for the IPO shares received during the road show. The negotiated discount at which the underwriters in a firm commitment IPO purchase shares from the issuer is typically 7% of the IPO price to the public, but can be less for IPOs in which:

  • investor interest in the issuer is expected to be exceptionally strong;
  • the offering amount is high; and
  • competition by investment banks for an underwriting mandate is vigorous.

The Financial Industry Regulatory Authority (FINRA) – a securities self‑regulatory organisation – reviews proposed underwriting compensation to ensure that it meets FINRA standards of fairness and reasonableness.

The allocation of IPO shares to investors in a firm commitment underwriting is managed through agreements among the investment banks participating in the IPO syndicate. The underwriting account is grouped into brackets with different underwriting commitments. An underwriter’s placement in a particular bracket is determined by a variety of factors, including:

  • business origination;
  • distribution capability; and
  • historical placement.

The book-running manager determines the allocation strategy for the offering or the form that the book of orders for IPO shares should take, in accordance with market conditions and in consultation with the issuer.

Follow-on offerings

Types/pros and cons

What types of follow-on offering are commonly used in your jurisdiction, and what are the advantages and disadvantages of each?

A follow-on offering may be a primary or secondary offering or have both a primary and secondary component.

A primary offering is an offering by a company of newly issued securities. A primary offering of shares is dilutive to existing shareholders from a voting perspective. A company may sell a block of securities with the assistance of underwriters in a single underwritten offering or establish a programme such as an at-the-market offering programme, whereby the company sells securities over the course of an extended period through sales agents at prevailing market prices, subject to a maximum programme size set at the commencement of the programme.

A secondary offering is an offering of already-outstanding securities by a security holder of the company. In this case, the company may help to facilitate the resale of outstanding securities on behalf of the security holder, but the security holder, rather than the company, receives the proceeds of the offering. Because no new shares are issued in a secondary offering, this type of offering is not dilutive to existing shareholders. The company and the security holder typically agree on the parameters of the company’s assistance, including the company’s obligations to file and maintain the effectiveness of a registration statement that can be used to conduct the offering, in advance of the offering through the negotiation of a registration rights agreement.

Prospectus requirements

Applicability and exemptions

When must a prospectus be filed? Are there any notable exemptions?

When conducting an initial public offering (IPO), a registration statement containing a preliminary prospectus and certain other information must first be filed with the Securities and Exchange Commission (SEC). After responding to SEC comments following a review period, an issuer may solicit written offers to purchase the shares being registered only after filing an amended preliminary prospectus referred to colloquially as a ‘red herring’. The red herring contains almost all the information required in a final prospectus, except:

  • the final offering price;
  • the amount of proceeds;
  • the underwriting fees; and
  • other matters that relate to the offering price.

The red herring must also include a bona fide estimate of the price range for the shares to be sold. A final prospectus including this omitted pricing information must be filed by the second business day following the pricing of the IPO.

When an issuer conducts a follow-on shelf takedown offering from an already-effective shelf registration statement, it will typically file a preliminary prospectus before announcing or launching any marketing efforts with respect to the offering. The preliminary prospectus supplements a prospectus originally filed with the shelf registration statement and contains information particular to the specific offering, such as:

  • the number of securities to be sold;
  • the use of proceeds; and
  • specific terms of the underwriting agreement.

As in the IPO context, a preliminary prospectus excludes pricing-related information. The issuer must file a final prospectus incorporating the omitted pricing information by the second business day following the pricing of the offering.


What must the prospectus contain?

Securities legislation prescribes the required content of a prospectus and requires that the prospectus include additional information as may be necessary to ensure that the required statements are not misleading. The required contents of a prospectus include:

  • disclosure regarding the business of the issuer;
  • financial information of the issuer;
  • risk factors;
  • information about the management of the company and management compensation;
  • significant security holders;
  • information about the securities offered;
  • the use of proceeds from the offering;
  • the underwriters; and
  • the method of distribution.

Filing and approval procedure

What is the procedure for filing for and obtaining prospectus approval from the regulator? Can draft prospectuses be submitted to the regulator for preliminary comment?

IPO registration statements are subject to SEC review and may be submitted in draft form for confidential, non-public review. The SEC will typically provide comments on the initial registration statement within 30 days after submission. The company must publicly file any registration statement submitted confidentially at least 15 days before the IPO’s road show. After addressing all comments on the registration statement to the satisfaction of the SEC, the company may request that the registration statement be declared effective by the SEC.

Following an IPO, registration statements of certain issuers (generally including issuers that have been public for less than one year) may still be subject to SEC review, although the SEC has discretion to conduct a limited review or no review of a post-IPO registration statement. Certain large and seasoned issuers (ie, those that, among other things, have been public for at least one year and have a public float of at least $700 million) can conduct follow-on offerings using a shelf registration statement that is not subject to SEC review or comment.

Prospectus liability

What types of prospectus liability can arise (eg, statutory, contractual, tort)? Which parties may be held liable?

Parties may be held civilly or criminally liable if a prospectus included in a registration statement:

  • contains an untrue statement of a material fact; or
  • omits a material fact that:
    • must be stated therein; or
    • is necessary to ensure the statements therein are not misleading.

Section 11 of the Securities Act of 1933 is the primary provision providing for civil liability and provides that the parties that may be held liable include any person:

  • who signed the registration statement;
  • who was a director (or performed a similar function) or partner at the time of filing the registration statement;
  • who, with their consent, is named as being or about to become a director (or person performing a similar function) or partner;
  • whose profession gives authority to a statement made by them (eg, an auditor);
  • who, with their consent, is named as having prepared or certified any part of the registration statement; or
  • who is an underwriter.

In addition, any person who controls any of the foregoing may be liable.

What defences are available for liable parties?

Parties other than the issuer may rely on the affirmative due diligence defence provided by Section 11 of the Securities Act, which provides that no person will be held liable if they undertook a reasonable investigation before the registration statement took effect and believed that the information in the registration statement was true and that there were no material omissions.



What methods are commonly used to market equity security offerings in your jurisdiction?

Under securities legislation, US equity offerings are not generally marketed through television, radio or print advertising. Larger offerings are typically marketed with the assistance of investment banks acting as underwriters or placement agents. The investment bank will set up a series of meetings and conference calls with potential institutional investors, during which the issuer will give a presentation (known as a road show), which is typically supported by an extensive disclosure document, such as the prospectus in a Securities and Exchange Commission (SEC)-registered offering. It is also common for issuers to record the road show presentation, which the investment bank can make available to potential investors that do not attend in person.

Smaller equity offerings are often executed without the assistance of an investment bank and are marketed directly by issuer employees to potential investors. In recent years some smaller offerings have been marketed through internet portals pursuant to the SEC’s new crowdfunding rules or pursuant to private placement exemptions from SEC registration.

Rules and restrictions

What rules and restrictions (if any) apply to the marketing of equity securities?

In an SEC-registered offering, there are a number of rules which result in the prospectus that is part of the SEC registration statement being the primary written offering document. In addition, liability provisions heavily discourage the use of traditional advertising methods, other than a brief press release announcing the offering. In 2005 the SEC liberalised the communication restrictions in an SEC-registered offering, but market practice has largely continued to follow the pre-2005 practices of using a limited announcement press release, the SEC-filed prospectus and a road show presentation as the principal marketing materials.

Most private placements are conducted in accordance with SEC rules that do not permit advertising. In these cases, marketing materials are provided only to persons with whom the issuer or its placement agent has a pre-existing relationship. The SEC has adopted rules that permit advertising in private placements if certain additional conditions are met, but most issuers have not used this option.


To what extent is bookbuilding used in your jurisdiction, and how does the process customarily play out? What are the advantages and disadvantages of using this process?

In marketed, underwritten SEC-registered offerings and private placements involving placement agents, traditional bookbuilding continues to be the norm. During the marketing period – which for initial public offerings is typically one to two weeks and for offerings by seasoned companies is typically a few hours – the underwriter or placement agent will build a book of orders that ideally is substantially more than the amount offered. The issuer and the underwriter or placement agent will then review the book to determine the appropriate offering price, taking into consideration the desired investor mix. Underwriters and placement agents usually have the option to acquire additional shares from the issuer (typically 15% of the base offering) within a set period (typically 30 days). This permits the underwriter or placement agent to commit to sell more than the base amount and then use either the option or securities acquired after pricing to stabilise the price of the security in the after-market. In offerings with traditional bookbuilding, the underwriter bears little pricing risk.

In the past 15 years there has been a growing trend for large public companies with highly liquid securities to forego marketed offerings and instead sell, with little notice, a block of shares to an investment bank at a negotiated price. These offerings, known as ‘bought deals’, do not involve bookbuilding and put the resale pricing risk entirely on the underwriter. In recent years some issuers pursuing bought deals have used an auction process, whereby a number of different investment banks are invited to submit a price at which they would be willing to buy a specified amount of the issuer’s securities.

Role of advisers

Adviser roles and responsibilities Describe the role and responsibilities of the following advisers in the context of equity securities offerings, including how their relationship with the issuer is formalised (eg, through terms of agreements):

(a) Banks/underwriters?

Underwriters act as facilitators for equity securities offerings, serving as intermediaries between issuers and investors. Offerings (both initial public offerings (IPOs) and subsequent offerings) are typically facilitated by a syndicate of underwriters. The lead underwriters in an offering:

  • advise the issuer on timing and demand, as well as the structure of the offering;
  • advise the issuer on financial aspects of the offering, including helping the issuer to determine:
    • how much capital it needs;
    • the amount of securities to be issued; and
    • the starting share price (in an IPO); and
  • manage the marketing of the securities to prospective investors.

In an IPO, the underwriters’ advice regarding valuation is of particular importance where there is no independent market valuation for the securities.

A broader syndicate of underwriters usually assists with marketing and distributing the securities. In an IPO, underwriters will typically stabilise or support the market price of the securities by repurchasing shares in the secondary market when the price of the newly issued shares is shaky in trading.

The underwriters’ relationship with the issuer is formalised through the underwriting agreement, which contains details of the offering, including:

  • the underwriters’ commitment to purchase the new securities;
  • the price to be paid by the underwriters; and
  • the public offering price.

(b) Auditors?

The primary role of the independent registered public accounting firm (the auditor) in an offering is to audit the issuer’s annual financial statements. Although there are hundreds of accounting firms registered with the Public Company Accounting Oversight Board, the largest public accounting firms audit most public companies.

In addition to auditing the issuer’s annual financial statements, the auditor:

  • assists the issuer with preparing the financial statements and registration statement for the offering;
  • reviews unaudited interim financial statements included in the registration statement;
  • reviews financial information in the registration statement as part of the due diligence process; and
  • issues a comfort letter (negotiated between the auditor and underwriters) at the pricing of the offering, addressed to the underwriters and the issuer's board of directors, relating to the financial statements and other financial information included in the registration statement.

The terms of the auditor’s engagement for the audit or the offering are formalised in an engagement letter, which it enters into with the issuer. Before accepting the engagement, the auditor completes engagement acceptance procedures to ensure, among other things, that it is independent from the issuer.

Outside of the offering context, the auditor will audit and review the issuer's financial statements included in its Securities and Exchange Commission reports.

(c) Lawyers?

Separate legal counsel is retained by the issuer and the underwriters in a securities offering. In offerings that will include sales by stockholders, the selling stockholders will also often engage their own legal counsel. For companies in highly regulated industries or with non-US operations, the issuer and underwriters may retain lawyers that specialise in these matters.

In a securities offering, lawyers play an important role in advising the issuer and the underwriters on how the offering can be completed within the regulatory framework. The lawyers:

  • assist their respective clients in the preparation of the registration statement (with the issuer’s counsel taking the lead);
  • conduct due diligence;
  • manage relationships with securities regulators and stock exchanges;
  • draft and negotiate the underwriting agreement; and
  • ensure the smooth completion of the transaction.

The lawyers will also be required to provide legal opinions regarding the offering and negative assurance letters stating that, based on specific inquiries (and subject to exclusions for financial and other information provided by experts), they are unaware of anything that may indicate that the prospectus contains any material misstatement or omission.

The client-lawyer relationship is formalised by the execution of an engagement letter outlining the scope of their legal engagement for the offering.

(d) Any other relevant advisers?

At or before its IPO, the issuer will appoint a registrar and transfer agent to administer its stock transfer records in order to facilitate the increased trading of its securities. Issuers typically retain a financial printer to help with the professional typesetting of the prospectus and to print physical copies of the prospectus to distribute to potential investors. An issuer may also retain an outside investor relations firm and other professionals. These relationships are typically formalised by an engagement letter or agreement with the issuer.

Continuing obligations

Continuing obligations

What continuing obligations apply to issuers of equity securities? What are the penalties for non-compliance?

An issuer of equity securities registered in the United States and listed on a US stock exchange must make regular disclosure to the market of significant developments affecting its business or the value of its securities. There are two general types of public disclosure obligation imposed on an issuer.

First, the issuer must file various reports and other information with the Securities and Exchange Commission (SEC) and may choose to make voluntary filings of certain other reports, all of which are available to the public.

Second, the issuer is subject to continuing obligations to disclose material information concerning the issuer (generally by means of a press release) on a timely basis. Continuing obligations that apply to issuers of equity securities include the following:

  • Issuer obligations:
    • Periodic and current reports – the issuer must file annual reports with the SEC on Form 10-K or Form 20-F. If the issuer is a domestic issuer, it must also file quarterly reports on Form 10-Q and (following specified events) current reports on Form 8-K.
    • Public disclosures – the issuer must make timely and complete disclosure of material corporate developments to the public and avoid selective disclosure of material non-public information.
    • Annual stockholder reports and proxy solicitationsif the issuer is a domestic issuer, it must provide stockholders with an annual report containing audited financial statements and other required disclosures, and must solicit proxies of its stockholders in accordance with the SEC rules.
    • Internal controls – the issuer must maintain a system of internal control over financial reporting and disclosure controls and procedures that will ensure that its books and records produce fair and accurate financial information and that accurate and timely information is properly disclosed.
  • Corporate governance:
    • Director independence – the issuer’s board of directors must be composed of a majority of independent directors, with the non-management directors meeting at regularly scheduled executive sessions without the non-independent directors.
    • Audit committee – the issuer must maintain an audit committee composed of at least three directors, all of whom must be independent and must meet the additional requirements for independence set forth in the Exchange Act of 1934. Each member of the audit committee must be financially capable of meeting the requirements of the applicable stock exchange listing rules. Among its responsibilities, the audit committee must review and approve transactions with related persons involving the company.
    • Other committees – subject to the exceptions set forth in the applicable stock exchange listing rules, the issuer may be required to maintain a compensation committee and a nominating committee composed of two or more independent directors. Directors on the compensation committee must also the meet additional independence requirements set forth in the applicable stock exchange listing rules.
    • Charter requirements – subject to certain exceptions set forth in the applicable stock exchange listing rules, the issuer must adopt and maintain publicly available charters for the audit committee, the compensation committee and the nominating and corporate governance committee.
    • Pre-approval of auditor engagements – the issuer’s audit committee must approve the engagement of the issuer’s auditor and pre-approve all:
      • audit, review or attest services; and
      • permitted non-audit services to be performed by the auditor.
    • Code of conduct – the issuer must adopt and maintain a publicly available code of business conduct and ethics applicable to all directors, officers and employees. This requires board approval and disclosure of any waiver of the code of conduct for a director or executive officer.

If an issuer of equity securities fails to file the required periodic reports with the SEC, the SEC can bring an enforcement action against the issuer seeking injunctive relief. In addition, the SEC can impose penalties on executive officers of the issuer who have knowingly made false certifications in connection with a publicly filed periodic report. Finally, failure to comply with a stock exchange’s continued listing requirements can result in a suspension of trading of the issuer’s equity securities or delisting.

Market abuse provisions

Rules and restrictions

What rules and restrictions are in place to combat market abuse and insider trading? What are the penalties for breach of these rules?

Rule 10b-5 is designed to protect against fraud in connection with the purchase or sale of an issuer’s equity securities. The rule makes it unlawful for any person, in connection with the purchase or sale of any security, to:

  • employ any device, scheme or artifice to defraud;
  • make any untrue statement of a material fact or omit a material fact necessary to ensure that a statement is not misleading; or
  • engage in any act, practice or course of business that would constitute fraud or deceit on any person.

With respect to individuals, the rule makes it illegal for any ‘insider’ (a term that ordinarily would include directors and officers) to misuse material non-public information in connection with the purchase or sale of the issuer’s securities. Misuse of such information (which is commonly known as ‘inside information’) includes using it personally for trading purposes without disclosing it to the party on the other side of the transaction or tipping the information to another person who uses it for trading purposes. In most instances, disclosure of the information to the other party is prohibited because of the insider’s obligation to the issuer to maintain the confidentiality of the information. As a result, an insider generally must abstain from trading when in possession of material non-public information.

Parties that violate Rule 10b-5 may be subject to civil liability to purchasers or sellers of the issuer’s securities which do not possess the undisclosed information and criminal action. The SEC may also initiate civil proceedings seeking penalties of up to three times the amount of profit gained or loss avoided by the trading party, as well as significant fines. Moreover, the SEC can seek injunctions or cease and desist orders against illicit traders, and can seek to bar such persons from serving as directors or officers of public companies.

Pursuant to Section 21A of the Exchange Act, the SEC may subject control persons to penalties for insider trading violations by persons who they directly or indirectly control, when they knew or recklessly disregarded the fact that such persons were likely to engage in insider trading and failed to take appropriate steps to prevent this. A successful action by the SEC under this provision can result in a civil fine equal to the greater of $1 million or three times the profit gained or loss avoided. The issuer and its directors and officers could be deemed to be control persons and therefore subject to potential liability under Section 21A. Accordingly, such parties should maintain an awareness of possible insider trading violations by persons under their control and take measures where appropriate to prevent such violations.

Tax liabilities

Applicable taxes

What tax liabilities arise in relation to the issue and trade of equity securities in your jurisdiction?

Most US issuers of public equity securities are corporations for US federal income tax purposes. In general, no US federal income tax liabilities are imposed on the issuer or the holders from the mere issuance of equity securities. US holders are generally subject to US income tax at the ordinary rates on distributions (to the extent of the issuer’s earnings and profits) and on any gain from the sale or other disposition of the securities. However, individuals who have held the securities for at least one year may be eligible for reduced capital gain rates on any gain from the sale or other disposition of the securities. If the issuer is a US entity, distributions to non-US holders may be subject to US withholding taxes, which may be reduced or eliminated under the terms of an applicable income tax treaty. Issuers are generally not entitled to a US tax deduction for distributions on equity securities, with certain exceptions (eg, real estate investment trusts (REITs) and mutual funds). Non-US holders generally are not subject to US federal income tax on gains from the sale or other disposition of equity securities, with the exception of gains from the disposition of securities of corporations that own substantial US real property.


How can these tax liabilities be mitigated?

There are few ways to mitigate the typical US federal income tax consequences for issuers and holders of equity securities. Certain types of corporation (eg, REITs and mutual funds) may be entitled to a deduction for distributions on equity securities. Partnerships and limited liability companies engaged in certain businesses – mainly related to oil and gas – can be treated as flow-through entities, rather than taxable corporations, for US federal income tax purposes. Since interest payments are generally deductible for US federal income tax purposes, issuers should consider issuing debt securities instead of equity securities – although the recently enacted tax reform law places new limitations on the deductibility of business interest.