IPO Disclosure – The Prospectus The IPO registration statement includes a prospectus that describes, among other matters: the offering terms; the anticipated use of proceeds; the REIT; its industry, business (including competitive strengths and growth strategies), management and ownership; and the REIT’s historical results of operations and financial condition. Although the prospectus is principally a disclosure document, it is also crucial to the marketing and sale process. As a result, the underwriters and the company will work together to draft a compelling description of the REIT’s business as an attractive investment proposition. As a disclosure document, the prospectus functions as an “insurance policy” of sorts in that it is intended to limit the issuers’ and underwriters’ potential liability to IPO purchasers. If the prospectus contains all SEC-required information, includes robust risk factor disclosures that explain the material risks and uncertainties that the REIT may encounter, and the related consequences if those risks were to be realized, and has no material misstatements or omissions, it will be challenging for investors to recover their losses in a lawsuit if the price of the stock drops following the IPO. A prospectus should not include “puffery” or overly optimistic or unsupported statements about the company’s expected future performance. Rather, it should contain a balanced discussion of the company’s business (with meaningful cautionary language relating to potential future events), along with a detailed discussion of risks, material operating and financial trends, and material uncertainties that may affect its financial condition, results of operations, and prospects. SEC rules set forth specific disclosures to be made in a prospectus for an IPO, as well as for ongoing disclosures once the issuer is public. The general form for an IPO by a U.S. domestic entity is Form S-1. However, real estate companies, including REITs, are instead required to use Form S-11. In addition to the disclosures required by Form S-1, Form S-11 sets forth the following disclosure requirements: ■ Investment policies with respect to investments, mortgages, and other interests in real estate in light of the issuer’s prior experience in real estate; ■ Location, general character, and other material information regarding all material real properties held or intended to be acquired by or leased to the issuer or its subsidiaries. For this purpose, “material” means any property that has a book value of 10% or more of the total assets of the consolidated issuer or the gross revenues from which are at least 10% of the aggregate gross revenues of the consolidated issuer for the last fiscal year; ■ Operating data of each improved property, such as occupancy rates, number of tenants, and principal provisions of the leases; and ■ Arrangements with respect to the management of the issuer’s real estate and its purchase and sale of mortgages. Furthermore, and in contrast to the general requirements of Form S-1, which is applicable to non-real estate companies, Form S-11 and the SEC’s Industry Guide 5 contain detailed disclosure requirements regarding real estate ownership, investment policies, operating data, descriptions of real estate assets, and, with respect to blind pool REITs, disclosures about the prior performance of sponsors and their affiliates. Most new REITs will qualify, however, as EGCs and can take advantage of the scaled disclosure requirements available for smaller public reporting companies. See “Emerging Growth Companies.” Regardless of EGC status, however, an issuer should be prepared for a time consuming drafting process, during which the issuer, the underwriters, the independent auditors, and their respective legal counsel work together to craft the prospectus disclosure. Blind pool REITs, which are REITs that do not own assets and do not identify specific real properties or real estate related debt instruments to be acquired with substantially all of the net proceeds from the potential IPO (with the properties or loans being determined after the closing of the IPO in accordance with a predetermined investment strategy), are also subject to the SEC’s Industry Guide 5, which sets forth the following additional disclosure requirements: ■ risks relating to: (i) management’s lack of experience or lack of success in real estate investments, (ii) uncertainty if a material portion of the offering proceeds is not committed to specified properties, and (iii) real estate limited partnership offerings in general; ■ the general partner’s or sponsor’s prior experience in real estate presented in tabular format outlining, among other items, historical returns; and ■ risks associated with specified properties, such as competitive factors, environmental regulation, rent control regulation, and fuel or energy requirements and regulations. 13 | 2024 Guide to REIT IPOs and Listing Transactions
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