The US continues to be the world’s largest capital market and a key source of funding for companies. As a result, many companies, wherever they are seeking a listing, will want to market their offering to US institutional investors: it is common to do this in conjunction with a London listing.
Under US federal securities law, shares may not be offered or sold in the United States unless such shares are (i) registered under the US Securities Act of 1933, as amended (which would typically only occur if the company is seeking a US listing or is already listed in the US), or (ii) offered and sold in transactions that are exempt from the registration requirements under the US Securities Act. Offers and sales to US investors during this process are generally restricted to large institutional investors only. Marketing of the IPO to potential investors in the United States is also tightly controlled, both as a result of the requirements of the Securities Act requirements and potential liability concerns for the company and the banks involved in the transaction.
Depending on a number of factors, including for example the overall size of the transaction, the amount and type of marketing conducted in the United States and the size of the US tranche of the offering, the banks involved in the transaction may require the provision of a comfort package from the layers and accountants.
In a typical transaction that includes a US offer, a “no registration opinion” will be provided by the US lawyers to the company and the banks. The “no registration opinion” provides that, on the basis of certain factual representations and assumptions, the shares offered in the IPO do not need to be registered under the US Securities Act.
A “10b-5 letter” is also usually provided by both sets of lawyers and confirms that they have undertaken certain due diligence procedures and that, on the basis of such procedures, they have no reason to believe that the prospectus contains an untrue statement of material fact or omits to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. In order to provide this letter, the due diligence and disclosure processes for the transaction as a whole will generally be managed from the start by the US lawyers involved in the transaction.
A “SAS 72 comfort letter” is provided by the relevant accounting firm and confirms that procedures have been conducted to ensure the accuracy of the financial and certain other operating information in the prospectus. The letter also provides negative assurances as to the content and quality of any unaudited interim financial statements and to any changes occurring after the period ended in the most recent financial statements. The letter is used in relation to the offer and sale of shares to investors in the United States. The “SAS 72 lookalike comfort letter” is a nearly identical letter that is used for the offer and sale of shares to investors located outside of the US and UK.
The process behind each of these letters and opinions will add costs to the transaction. However, with the exception of small IPOs, most companies, sponsors and banks agree that the advantages of being able to tap into the US market far outweigh the additional costs.
US securities lawyers will need to be engaged by both the company and the banks to issue no registration opinions and 10b-5 letters, so engaging a law firm – such as Travers Smith – that is able to provide both English and US legal advice from a London-based team on an offering provides significant advantages.