Investor Relations and Reporting Law and Legal Definition
Once a privately held company issues shares of stock to the public—through an initial public offering (IPO), for example—it incurs a number of new responsibilities related to investor relations and reporting requirements. Also known as "going public," an IPO transforms a business from a privately owned and operated entity into one that is owned by public stockholders. An IPO is a significant stage in the growth of many businesses, as it provides them with access to the public capital market and also increases their credibility and exposure. Becoming a public entity also involves significant changes for a business, changes that include a substantial increase in both the number and complexity of the reports the company is legally required to file.
LEGAL REPORTING REQUIREMENTS
In 1934, the Securities Act was passed. This act provided for the establishment of the Security and Exchange Commission (SEC) as the agency authorized to oversee the act's provisions. The SEC regulates all publicly traded companies. SEC reporting requirements are extensive. In addition to the periodic reports known as 8A, 10K, and 10Q, public companies must issue annual reports, quarterly reports, proxy statements, and press releases in order to keep shareholders, financial analysts, and regulatory agencies informed of their actions.
Form 8A
This is the main form for registering a stock issue with the SEC. It must be filed if the shares will be traded on a major stock exchange (NYSE, AMEX, or NASDAQ), if the firm will have more than 500 shareholders, or if it has more than $3 million in assets. Companies that register their stock offerings using Form 8A must also file periodic reports until they no longer meet the aforementioned requirements. These updates are an important means of communication with shareholders, who use the information in making investment decisions.
Form 10K
All public companies are required to file Form 10K annually within 90 days of end of their fiscal year. This form requires disclosure of the company's audited financial statements, a summary of operations, a description of the overall business and its physical property, identification of any subsidiaries or affiliates, disclosure of the revenues contributed by major products or departments, and information on the number of shareholders, the management team and their salaries, and the interests of management and shareholders in certain transactions. The idea of Form 10K is to update on an annual basis the information that the company provided for its initial filing.
Form 10Q
Another SEC required form is Form 10Q. This form must be filed within 45 days of the end of each of the first three quarters in a company's fiscal year, includes audited financial statements with management discussion, as well as details of any corporate events that had a significant impact on the company.
Form 8K
Another important reporting requirement is Form 8K, which discloses major changes in corporate control or assets due to such events as mergers, acquisitions, or bankruptcy. Several other types of filings are required for specific events, such as a significant increase or decrease in the amount of outstanding stock, or distributions to shareholders in the form of stock splits or dividends. In addition, public companies are required to inform stockholders of impending meetings or votes and send out proxy statements. Finally, insider trading laws require that public companies disclose any changes in the holdings of managers or directors who own more than 10 percent of the company's stock.
The Fair Disclosure Regulation, enacted in 2000, stipulates that publicly traded companies broadly and publicly disseminate information instead of distributing it selectively to certain analysts or investors only. Companies are encouraged to use several means of information dissemination including news releases, Web sites or Web casts, and press releases.
In 2002 Congress passed the Sarbanes-Oxley Act and it was signed into law. This act came about in the wake of serious allegations of accounting fraud and a string of bankruptcies of very high-profile, publicly traded companies. The act established stricter reporting requirements and increased the personal responsibility that both CEOs and CFOs must take on when signing corporate reports. Meeting the requirements of this law has increased the workload for publicly traded firms and the firms that do their auditing work. In particular, Section 404 of the Sarbanes-Oxley Act requires that a company's annual report include an official write-up by management about the effectiveness of the company's internal controls. The section also requires that outside auditors attest to management's report on internal controls. An external audit is required in order to attest to the management report.
BEYOND SEC REQUIREMENTS
In addition to SEC reporting requirements, public companies also face the responsibility of maintaining good investor relations. Although it is not legally required, it is nonetheless important for all companies to establish systems to deal with stockholders, financial analysts, the media, and the overall community. One of management's key responsibilities in addition to managing the business and overseeing all regulatory reporting requirements is to keep the investor's informed about company activities.
It is therefore vital that interested outsiders are presented with a complete and accurate picture of what is happening within the company. In some cases, this may entail obtaining the services of a public relations firm that specializes in investor relations. Such firms can guide newly public companies through the maze of information that they must disseminate. In addition, many smaller companies with limited resources will utilize the services of outside consultants who can help them meet their goal of providing full, accurate, and accessible information for disclosure to investors. Companies who decide to pursue this route should consider the following when selecting a consultant:
Reputation. References, qualifications, and experience of prospective investor relations firms should be closely examined.
Methodology. Consultants have different methodologies, strategies, and philosophies, and it is the small business owner's obligation to research these variables and determine which firm is the best fit for his or her own company.
Compensation structure. Investor relations consultants maintain a wide array of compensation and billing structures. "Understand how the billing is done, how expenses are allocated, and what services the company will receive," counseled Michael Noonan in Houston Business Journal. "Clearly identify the terms and responsibility for each party and put the deal in writing." At the same time, companies seeking assistance in this area need to undertake a frank appraisal of their own budgetary constraints.
SEE ALSO Financial Statements; SEC Disclosure Laws and Regulations
BIBLIOGRAPHY
Cole, Benjamin Mark. The New Investor Relations: Expert Perspectives on the State of the Art. Bloomberg Press, October 2003.
"Fresh Strategies are Needed for the New SEC Reporting Requirements." Corporate Board. March-April 2003.
MacAdam, Donald H. Startup to IPO. Xlibris Corporation, 2004.
Mirza, Patrick. "Some Companies Struggle to Meet SEC Reporting Requirements." HRMagazine. May 2004.
Noonan, Michael D. "Proper Investor Relations Plans May Require Outside Consultants." Houston Business Journal. 15 September 2000.
Roberts, Holme, and Harold A. S. Bloomenthal. Going Public Handbook. Clark Boardman, 1991.
Hillstrom, Northern Lights
updated by Magee, ECDI
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