IPO Basics: Stock Exchanges and Securities Laws
Founded in 1792, the New York Stock Exchange (NYSE) is home to some of America's best-known corporations. Its roster includes both traditional businesses, such as General Electric, Exxon, and Wal-Mart, and the new economy powerhouses of America Online, IBM, and Lucent Technologies. Its rival, the NASDAQ stock exchange, is equally well positioned. This self-billed "stock market for the next hundred years" boasts a following of such high-tech titans as Microsoft, Cisco Systems, and Intel.
While each exchange offers its advantages and disadvantages, a company contemplating a public offering will often focus on the exchange's listing requirements, which include the following factors:
- Pretax income
- Market value and share size of public float
- Net tangible assets
- Number of shareholders
- Share price
In general, the NASDAQ National Market Requirements are less restrictive than the NYSEListing Requirements. This explains why most nascent high-tech companies elect to list with NASDAQ instead of the NYSE. For example, the NYSE requires that companies going public on its exchange demonstrate a certain level of pretax income.
Example - NYSE Listing Requirements
Either $2.5 million before federal income taxes for the most recent year and $2 million pretax for each of the preceding two years, or an aggregate for the last three fiscal years of $6.5 million together with a minimum in the most recent fiscal year of $4.5 million. (All three years must be profitable.)
In contrast, NASDAQ requires only $1 million in pretax income in the latest fiscal year or in two of the last three fiscal years. However, even some dot.com companies cannot meet these relaxed standards. So, NASDAQ offers two other listing options based on a combination of assets, revenues, operating history, and market value in lieu of pretax income.
Federal and State Securities Laws
Once a company elects to list with the NASDAQ National Market System, it must register under the Securities Exchange Act of 1934. This act requires publicly held companies to disclose information continually about their business operations, financial conditions, and managements. In addition, these companies, and in many cases their officers, directors, and significant shareholders, must file periodic reports or other disclosure documents with the SEC. In some cases, the company must deliver the information directly to investors. Company counsel will usually register the company under the Securities Exchange Act concurrently with the IPO registration statement filing.
In addition to federal securities law, a company may also have to comply with state securities laws, also known as "blue sky" laws. Some states focus on whether the companies have disclosed to investors all information needed to make an informed investment decision, while others use substantive standards to ensure that the terms and structure of the offerings are fair to investors, in addition to the disclosure requirements.
The underwriter's counsel usually handles compliance with blue-sky laws, and the company will pay the expenses subject to a cap on attorneys' fees. However, trading on the major exchanges will eliminate the need for preoffering state filings.
Copyright 1999 Findlaw Inc.
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