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Young attorneys for fast-growing e-commerce and Internet companies know that the goal of many such businesses is to conduct an initial public offering — and to do so as quickly as possible. An initial public offering is an attractive option for many Internet companies because it provides significant amounts of cash for operating purposes and ready access to the capital markets for future rounds of financing. In addition, if a strong after-market develops for the company’s shares, the founders and other insiders will have a liquid market in which they can eventually sell some or all of their shares. While the benefits of an initial public offering are well known to the founders and officers of e-commerce companies, the obligations and responsibilities that go along with being publicly traded are often overlooked. Counsel for companies that plan to go public must make their clients aware of the significant responsibilities that are placed on the corporation, as well as on individual officers, directors and shareholders. Significant liability can be imposed for violations of the securities laws, and such considerations must be addressed early on to ensure that an initial public offering is the best alternative for a particular company. For young lawyers working for new companies — or for other attorneys curious about what such work entails — this article will address the primary obligations imposed on the corporation after an initial public offering. (Counsel should review the obligations imposed on individual corporate officers and directors with any company that is considering going public so as to ensure that the officers and directors know just what going public entails.) A publicly traded company is subject to various reporting, filing and disclosure requirements. These obligations arise primarily out of the Securities Act of 1933, the Securities Exchange Act of 1934 and the rules and regulations promulgated under these statutes by the U.S. Securities and Exchange Commission. Important obligations also arise out of the contract through which the company lists its shares for trading on a stock exchange, including the Nasdaq system. It is important to note that the statutory and contractual obligations imposed on a public company frequently overlap. For this reason, it is often the case that a single event or occurrence gives rise to obligations under more than one statutory provision, or to both statutory and contractual obligations. REPORTS TO THE SEC A publicly traded company whose shares are registered under Section 12(g) of the Exchange Act becomes subject to Section 13 of the Exchange Act, which imposes a duty to file certain reports with the SEC. Annual reports on Form 10-K must be filed by the company with the SEC annually within 90 days after the end of the company’s fiscal year. The Form 10-K must include, among other things, certified financial statements, management’s discussion and analysis of financial condition and results of operations and information concerning the company’s management, securities and stockholders. A quarterly report on Form 10-Q must be filed by the company within 45 days after the end of each of its first three fiscal quarters of each fiscal year. The quarterly report must contain, among other things, condensed financial statements as well as an analysis by management of the company’s financial condition and results of operations. The Form 10-Q may also discuss legal proceedings, changes in securities and other information. A current report on form 8-K is required to be filed with the SEC on the occurrence of certain specified events. Reports disclosing changes in control of company, material acquisitions or dispositions of assets, bankruptcy or receivership must be filed within 15 calendar days following the event. Changes in the certifying accountant or the resignation of the company’s directors must be filed within five business days of the event. The rules governing the solicitation of proxies are set forth in Section 14 of the Exchange Act. Generally, no proxy solicitation may be made unless the stockholders are furnished with written statements containing the information contained in Schedule 14A of the proxy rules. Preliminary copies of the solicitation materials must be filed with the SEC at least 10 days prior to the date definitive copies of such materials are first sent to stockholders. However, if at the stockholder meeting the stockholders are only electing directors, approving the selection of the company’s accountants or acting on a stockholder proposal, then preliminary copies of the solicitation materials need not be filed with the SEC. Definitive copies of the proxy materials and all other soliciting materials must be sent to the SEC not later than the date such materials are first sent or given to any stockholder. The SEC reserves the right to review and comment upon all proxy and other solicitation materials. ANTIFRAUD RULES In addition to the reporting requirements discussed above, a newly public company is subject to the antifraud provisions of the Securities Act, the Exchange Act and the rules of the SEC and various rules relating to the public disclosure of corporate information. The general antifraud provisions of the Securities Act are found in Section 17(a) while the general antifraud provisions of the Exchange Act are found in Section 10(b). The antifraud rules can be a minefield for newly public companies. Decisions regarding whether information is material, and if so, how to properly disclose such information are often judgment calls that must be made in conjunction with the advice of counsel. Moreover, issues about the timely disclosure of material corporate information has received a great deal of attention from the SEC and other regulatory bodies as of late. DISTRIBUTING INFORMATION Also, distributing corporate information to the public requires careful attention. Material information cannot be released only to certain analysts or only to those analysts who contact the company. Material information is required to be widely disseminated. One of the most effective means of publicly disseminating such information is to arrange for an announcement on the Dow Jones News Service and Reuters Economic Services. The company may also deliver a press releases to The Wall Street Journal and The New York Times. Every press release should include the name and telephone number of an officer of the company who will be available to confirm or clarify the release. Additionally, the company will likely be required to notify representatives from the stock exchange on which its securities trade prior to the release of major announcements to the media. Some period of delay should occur after the release of material information before any trading is done by corporate insiders. This delay will allow the market to absorb the new information and presumably alter the company’s share price accordingly. In the event of particularly important disclosures, the markets on which the company’s shares trade may halt trading pending the announcement. There will be occasions when a company is unwilling to make public disclosure of certain information about its affairs where disclosure would be premature and possibly contrary to a company’s business interests. Withholding certain information is justified where the premature announcement of events that fail to materialize will constitute a violation of the antifraud rules. ‘NEED-TO-KNOW’ POLICY In this regard, companies should establish a “need-to-know” policy that is intended to restrict to as small a group as possible access to information about material developments. Companies should recognize, however, that if information about material developments goes beyond this group, the company should be prepared either to make prompt and complete disclosure or to assume the risk of a claim that it has violated the antifraud rules. Prior to the announcement of a material development, it is important for a company to limit disclosure on a “need-to-know” basis and to take other precautions to guard against leaks or other premature disclosure. Moreover, as a means of preventing transactions by officers, directors and other corporate insiders based on material non-public information, the company should adopt written policies and procedures designed to restrict communication of non-public information and to monitor its dissemination. In addition, the company should establish guidelines for prompt and complete disclosure to stockholders and the financial community of all material developments that, if known, might reasonably be expected to influence the market price of the company’s securities or the investment decision of a reasonable investor. The SEC has publicly announced that it is on the prowl for violations of the insider trading provisions by Internet companies and their employees. The commission believes that the casual work environment of many Internet companies — with open offices and open lines of communication between top management and rank and file employees — can easily result in numerous employees having access to material, non-public information about upcoming corporate transactions or announcements. Therefore, it is particularly important to ensure that all employees of newly public Internet companies are aware of the restrictions against insider trading. Educating your clients early on about the foregoing issues will best ensure that a decision to go public is based on an accurate perception of both the benefits and the responsibilities that go along with being a publicly traded company. Robert G. Heim is a former assistant regional director of the SEC and is now a partner of Meyers & Heim in New York City. Howard Meyers, a partner at Meyers & Heim, assisted in the preparation of this article.

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