IPOsBenefit corporations and other impact-driven corporate entities, such as Delaware public benefit corporations and California social purpose corporations, are proliferating at a healthy pace. As many as 30 states have enacted benefit corporation statutes, and more than 1,000 companies have incorporated as benefit corporations or similar entities. With the number of impact-driven companies increasing rapidly, management of impact-driven companies are beginning to scale their impact through an initial public offering.

IPO Process

In order to become listed on a U.S. exchange like the New York Stock Exchange or a NASDAQ stock market, an impact-driven company would have to:

  • register its equity securities to be listed on the exchange with the US Securities and Exchange Commission, and
  • be accepted for listing on an exchange.

An impact-driven company that is also an “emerging growth company,” or “EGC” (a category of domestic or foreign issuer established by the JOBS Act of 2012 with total gross revenues of less than $1 billion), would be able to avail itself of certain accommodations in connection with its IPO, as well as its public obligations thereafter, for up to a maximum of five years.

Registering With the SEC

Registering with the SEC in connection with an initial public offering entails filing a registration statement (usually a Form S-1 for a domestic issuer) that is then declared effective by the SEC.

Registration Statement

The registration statement contains a prospectus, which serves as the main marketing and disclosure document for the offering of securities in the IPO and contains information about:

  • the issuer covering a variety of mandated topics such as business and financial information
  • management, directors and shareholders
  • the terms of the offering
  • risks related to the investment
  • other information and exhibits that are filed with the SEC but not distributed to investors by the corporation

Form S-1 Registration

A Form S-1 registration statement and the prospectus included therein must include certain financial information, typically three years of financial statements audited in accordance with U.S. GAAP and unaudited financial statements for any interim periods occurring prior to the listing, although, under the JOBS Act, an EGC may include only two years of audited financial statements and the unaudited interim financials.

Additional Disclosures

There are not currently any separate or additional SEC disclosure or other requirements applicable solely to benefit corporations or similar impact-driven companies. However, a registration statement must contain all material information necessary for investors to make their investment decision.

The SEC has not established a definition of “material,” but the term has been elucidated through informal SEC guidance and federal court decisions. The leading U.S. Supreme Court decisions on the subject established that a fact about an issue is “material” if the fact would alter the total mix of information available to investors, or a reasonable investor would consider the information important in making an investment decision.

Because the enabling statutes for impact-driven companies typically require such a company to provide an annual or biennial report describing its impact objectives and assessing its progress in promoting such objectives against internally established or third-party standards, it would be prudent for an impact-driven company to include information about its objectives, standards, and assessments of its progress during the periods for which financial statements are required (two or three years) in the registration statement and prospectus, since the information is likely to be considered material to investors in such a company.

Accounting Standards and Performance Metrics

The Sustainability Accounting Standards Board has developed sustainability accounting standards comprising disclosure guidance and accounting standards on sustainability topics for use by U.S. and foreign public companies in their annual filings with the SEC. These standards vary by industry and identify topics that may constitute material information for companies within each industry.

Although designed to support the disclosure of financial sustainability information, that is, financial information regarding environmental impacts caused and incurred, by public companies in required annual and periodic filings (on Forms 10-K, 20-F, and 10-Q), these standards could be easily adapted for use in IPO registration statements for companies with sustainability objectives.

The Global Impact Investing Network’s Impact Reporting and Investment Standards (IRIS) provide a significantly broader set of performance measurement metrics across a very broad set of very specific social, environmental, and other public benefit objectives. The metrics in the IRIS library could also be used to articulate public benefit objectives and standards for measuring an impact-driven company’s progress in promoting such objectives in a registration statement to give investors a clear understanding of the company’s success in promoting its impact goals.

It is possible that the SEC may eventually adopt rules requiring impact-driven companies to state their objectives, standards for measuring progress, and self-assessment of success in meeting the stated objectives as part of the disclosure requirements for such companies, although, given the breadth and distinctness of possible impact missions, it is unlikely the SEC will seek to establish specific standards that must be measured and disclosed.

Listing on an Exchange

In order to be accepted for listing on an exchange, a corporation must satisfy certain listing requirements. For instance, in order to list on the NYSE, a U.S. issuer must, upon consummation of the IPO, have a minimum of:

  • 400 U.S. shareholders, each holding at least 100 shares, and
  • 1.1 million public held shares with the market value of such held shares in the United States amounting to at least $60 million.

There are also certain financial tests that must be satisfied and alternative quantitative standards. The NASDAQ’s three markets have similar requirements, and both the NYSE and NASDAQ have various qualitative requirements, including corporate governance-related requirements that, among other things, require listed companies to maintain audit and compensation committees with independent directors.

Public Company Obligations

Following the effectiveness of the registration statement, an issuer becomes subject to the periodic reporting requirements of the Securities Exchange Act of 1934, other SEC rules applicable to public companies, and the rules of the exchange on which its shares are listed.

Periodic Reporting

A U.S. company must file an annual report on Form 10-K with the SEC after the end of each fiscal year, with audited annual financial statements.

Additionally, a U.S. company must file quarterly reports on Form 10-Q after the end of each of its first three fiscal quarters each year, with reviewed interim financial statements, and current reports on Form 8-K when certain specified events occur.

A U.S. company must also file a proxy statement for any shareholders’ meeting, including its annual meeting. The purpose of the SEC’s periodic reporting requirements is to ensure that investors receive material information related to their investment.

Because an impact-driven company typically must provide a report to its stockholders on the corporation’s promotion of its mission and its promotion of the best interests of its stakeholders on an annual or biennial basis, with stockholders having the ability to require such reporting annually, an impact-driven company that is a registered reporting company to the SEC should consider including such information in its periodic reports to the SEC, as it is material to investors generally as it, among other things, relates to the corporation’s continued compliance with applicable laws. The California Social Purpose Corporation statute actually states that the state reporting requirement can be satisfied by including the relevant reporting matters in the annual and period reports that must be filed with the SEC.

Going Forward

Benefit corporations, public benefit corporations, and their counterparts in other states reflect investors’ and managements’ increasing appreciation of social impact and other values beyond the maximization of strictly financial stockholder value. As these types of corporations eventually become listed reporting companies, we can expect rulemaking by the SEC, as well as accounting standards boards, to provide guidance on the kinds of new material information needed for these kinds of corporate entities to fulfill their unique duties.

Morrison & Foerster is one of the most knowledgeable firms in this space. The firm represents:

  • nonprofit and for-profit social enterprise companies
  • impact investors
  • venture funds.

Our work spans all aspects of impact investing, including advising companies on corporate forms and structuring transactions to help ensure impact.

For more information, contact impactinvesting@mofo.com.

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