Author of a book on public offerings discusses the type of information that must be disclosed during a public offering.
One of the characteristics of owning a private company is the extraordinary latitude you have in choosing what type of information you reveal to the outside world. Information about compensation and about supplier relationships, for instance, can be shielded from all but those who, in the view of management, absolutely need to know. But what happens if you're thinking about becoming a public company? How forthcoming must you be? For answers, we asked Gary Zeune, a Columbus, Ohio, certified public accountant and the author of a self-published book titled The Complete Guide to Public Offerings (614-221-6228, 1993, $69).
Inc.: Say I'm doing an initial public offering. What's the minimum amount of information I have to disclose? Zeune: You really should disclose your whole business plan, including the basis on which you compete. That's the foundation of what investors want to know, and regulators will insist on it. In any prospectus, you'll have to refer to your material business contracts -- your relationships with suppliers and customers, and even employ-ment arrangements. The painful part for many companies is that you need to file copies of the actual contracts. Anybody -- even your toughest competitors -- can go to the public reference room at the Securities and Exchange Commission, in Washington, D.C., to see them. Agreements that were once private need to be exposed to public view.
Inc.: You mentioned compensation. How detailed does a company need to be in that area? Zeune: Very detailed. Under new rules adopted by the SEC in late 1992, a company needs to disclose all forms of cash and noncash compensation given to the CEO and the top five officers making more than $100,000 a year, and the total amount paid to all other officers and directors as a group. This, too, has to be made publicly available to anyone who wants to see it. Newspapers like to get hold of this type of information, and fund-raisers love it. And it can be very divisive for a company when managers learn what their counterparts are making.
Inc.: In most prospectuses, investors get a long list of reasons for why the company may have a brutal time competing. Why do they have to be so negative? Zeune: The point of a prospectus is to highlight the things that can go wrong. If you fail to call attention to the pitfalls in your game plan, you can be sued for fraud. If you're in the plastics business and there's a chance that General Electric could come into the market and squash you like a bug, you need to say it -- even if you think your technology or your patents will protect you. It bothers a lot of CEOs that they have to identify all the chinks in their armor. But investors demand it, and the SEC requires it.