Benefit 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 35 states have enacted benefit corporation statutes, and more than 5,000 companies have incorporated as benefit corporations or similar entities. With the number of impact-driven companies increasing rapidly, the leadership of impact-driven companies are beginning to consider how they can scale their impact through an initial public offering.
Laureate Education has led the pack as the first publicly traded public benefit corporation, having raised $490 million during its 2017 initial public offering and demonstrating that an impact-driven company can attract major investors and achieve an exit through IPO.
The IPO process for an impact-driven company will be similar in many ways to that of any other company, but impact-driven companies will have unique disclosure issues to consider. Impact-driven companies may also be likely also to qualify as “emerging growth companies,” or EGCs (a category of domestic or foreign issuer established by the JOBS Act of 2012 with total gross revenues of less than $1 billion), and would therefore be able to avail themselves of certain accommodations in connection with its IPO, as well as public obligations thereafter, for up to a maximum of five years.
An initial public offering in large part entails filing a registration statement (usually a Form S-1 for a domestic issuer) that is subject to a detailed review by the Securities and Exchange Commission before to being declared effective prior to launch.
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:
A Form S-1 registration statement and the prospectus included typically contain 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; but under the JOBS Act, an EGC may include only two years of audited financial statements, together with the unaudited interim financials.
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 word “material” has not been defined by statute, 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 if 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 that company to include information about its objectives, standards, and assessments of its progress during the periods for which financial statements are required (whether two or three years) in the registration statement and prospectus, since the information is likely to be considered material to investors.
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’s) 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 their 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 would seek to establish specific standards that must be measured and disclosed.
In order to be listed on a U.S. exchange like the New York Stock Exchange or NASDAQ, an impact-driven company would have to satisfy certain listing requirements and be accepted for listing by the applicable exchange. For instance, in order to be listed on the NYSE, a U.S. issuer must, upon consummation of IPO, have a minimum of:
There are also certain financial tests that must be satisfied as well as 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.
Listing on an exchange also requires an application process with the applicable exchange and filing a registration statement on Form 8-A with the SEC, but both of these processes require disclosure of information that is largely duplicative of what is contained in the Form S-1 registration statement and prospectus.
Following the effectiveness of the Form S-1 registration statement for an IPO and the Form 8-A registration statement reflecting an issuer’s listing on an exchange, 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.
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 being able 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, among other things, such information 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.
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 financial stockholder value alone. As these types of corporations eventually become listed reporting companies, we can expect rulemaking by the SEC, as well as by 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 LLP is one of the most knowledgeable firms in this space. In addition to serving as primary outside counsel to over 100 public companies, advising at all stages from the newly public to the Fortune 500, the firm represents:
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