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Corporate, Securities

Remain mindful of social media limitations during IPO period

Although there are no specific regulations surrounding social media posting for companies launching an initial public offering (IPO), general rules on publicity and disclosure do still apply  — making it crucial for businesses to establish an effective communications policy, says Calgary corporate and securities lawyer Saptarshi (Rishi) Chakraborty.

Generally speaking, Chakraborty, a senior associate with Nerland Lindsey LLP, says for companies that have decided to go public via a prospectus filing, the process has three different periods — the pre-filing period, waiting period and post-final receipt period. Each has its own rules and requirements regarding what can and cannot be disclosed.

As Chakraborty tells, the pre-filing period typically begins when the business reaches an agreement with the investment banking firm that will act as an underwriter or agent, and it ends when the company files a preliminary prospectus with the securities regulators.

“Barring some limited exceptions, during this period, the company can make no offer to sell its securities to investors, and it should refrain from contacting prospective investors," he says.

Next, the waiting period begins when the company has filed a preliminary prospectus with the securities regulators, and it ends once the regulators have issued a receipt for the final prospectus. Offers to sell securities of the company are permitted during this period if they are made orally or by using a preliminary prospectus, Chakraborty says, and the business can also use certain legally prescribed materials to market its offering.

Finally, he says, the post-final receipt period begins when the final prospectus has been receipted, and the investment banking firm has confirmed that it is no longer distributing securities under the prospectus.

“During this period, sales are permitted, and certain communications are allowed,” says Chakraborty

Some situations where companies were found to have inadvertently tripped the rules, for example, include when a business's website or social media platforms contain content that is inconsistent with the prospectus or where a director or senior officer during the IPO process casually uploads content that is viewed as promoting the securities of the company, says Chakraborty.

But while many unauthorized disclosures during the going-public process are not made deliberately, they still may carry penalties.

“If a company is found to have made impermissible public communications during its going- public process, securities regulator(s) can refuse to issue a receipt for the final prospectus and institute a cooling-off period before the final prospectus can be filed and receipted,” says Chakraborty.

In addition, he says, companies may be forced to issue a news release refuting any statements that are incorrect or unduly promotional.

“Communications with the media, electronic communications, or content within the issuer’s website can also trigger liability under other laws, rules and regulations governing fraud and misrepresentation,” Chakraborty adds.

To help avoid these situations, he says, as part of its going-public process, companies should engage a team of advisors, such as legal counsel, who are familiar with the requirements.

As soon as a business begins to seriously contemplate a public offering of its securities, Chakraborty says its board of directors should consider instituting a corporate communications policy.

“If the company already has a similar policy in place, it should revisit that policy with legal counsel to ensure compliance with securities laws in light of its impending going-public process,” he adds.

Prior to commencing its IPO, senior management teams and board members also need to familiarize themselves with the various restrictions on their ability to communicate freely about the company — including via social media.

Chakraborty says other best practices include: designating a person or a committee to pre-approve all press releases, speaking engagements, interviews and major public relations and marketing activities and instituting an overall ban on interviews with media and other publications — including social media posts — concerning the company’s business unless authorized by the board of directors.

“The company’s website and all content on social media platforms should also be reviewed, and all data that is inconsistent with information in its prospectus should be deleted,” says Chakraborty.

“Also, all new content on the company’s website and social media should be pre-approved by the designated person or the committee before it is posted.”

Management, he recommends, should also use a standard response of “no comment” when receiving unsolicited requests for information about the offering.

“If such a reply is not practical, they should discuss alternate responses with legal counsel.”

Ultimately, going public is a substantial undertaking that demands a significant amount of management’s time and company resources — and legal counsel play a critical role in the process, says Chakraborty.

“The transition from a private to a public company is significant. Public companies’ operations and finances are subject to intense scrutiny by shareholders, analysts, other stakeholders and regulators.

“They must comply with onerous legal, governance and financial reporting requirements. These rules and regulations are often complicated — experienced legal counsel can help companies navigate these complex and myriad rules,” says Chakraborty.

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