In an initial public offering (IPO), a number of issues arise in connection with changing the number of shares to be sold or pricing above or below the price range that was previously disclosed in the preliminary prospectus (Marketing Prospectus). Determining the necessary legal requirements requires a thorough, and sometimes complex, analysis that often must be undertaken under significant time constraints. The guidance below provides a practical roadmap for resolving issues related to upsizing or downsizing an IPO whether through changes in the number of shares to be sold and/or changes in pricing.
Rule 430A under the Securities Act of 1933 (Securities Act) provides that, for purposes of Section 11 liability, an issuer may upsize or downsize an IPO if the changes in volume and price represent no more than a 20 percent change from the maximum aggregate offering price set forth in the fee table in the effective registration statement. The method of calculating the 20 percent threshold differs depending on whether the issuer completes the fee table in accordance with Rule 457(a) or Rule 457(o). In certain instances, such as selling stockholder transactions, the 20 percent threshold may be exceeded where the upsize or downsize does not result in material changes to the disclosure set forth in the prospectus contained in the effective registration statement. Further, in any upsize or downsize scenario, the issuer should also be mindful of its Section 12 liability and the need to convey information related to the upsize or downsize to investors prior to confirmation of sale.
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