The Underwriting Agreement and the Comfort Letter Prior to and during the waiting period, the issuer, the underwriters, any selling stockholders, their respective legal counsel, and the company’s independent auditor will negotiate a number of agreements and other documents, including the underwriting agreement and the auditor’s “comfort letter.” The underwriting agreement is the agreement pursuant to which the issuer (and, if applicable, any selling stockholders) will sell, and the underwriters will purchase, the shares being offered in the IPO. Most IPOs are conducted on a “firm-commitment” basis, in which the underwriters agree to purchase all of the shares (at a discount) and re-sell them to investors at the IPO price. Generally speaking, only a handful of provisions in the underwriting agreement raise substantive business or legal points that must be negotiated. Those provisions include, among others, representations and warranties of the parties, the allocation of costs of the IPO, certain “lock-up” provisions, and the right for the underwriters to terminate the underwriting agreement, and indemnification obligations. The underwriting agreement will also require (i) the issuer’s and underwriters’ respective legal counsel to deliver legal opinions (including a REIT tax opinion from the issuer’s legal counsel) and a negative assurance letter to the underwriters and (ii) the issuer’s auditor to deliver “comfort letters” at the time of pricing the IPO and at closing. As its name suggests, the purpose of the “comfort letter” is to provide comfort to the underwriters that a prospectus is materially accurate with respect to financial information included in the prospectus, thereby assisting the underwriters in establishing their due diligence defense against potential liability under the federal securities laws. In the comfort letter, the auditor affirms (i) its independence from the company and (ii) the compliance of the financial statements with applicable accounting regulations and SEC rules, such as regulation S-X. The auditor will also note period-to-period changes in certain financial statement line items. These statements follow prescribed forms and are usually not the subject of significant negotiations. The underwriters will also usually require that the auditor undertake certain “agreed-upon” procedures, which can be subject to significant negotiations, in which it compares financial information in the prospectus (outside of the financial statements) to the issuer’s accounting records to confirm its accuracy. Although different auditors may have different internal policies governing what can be included in the comfort letter, the contents of the comfort letter are generally governed by the AICPA’s AS 6101, which provides guidance to accountants on the preparation of comfort letters, including their scope and form. The guidance includes various examples in order to help ensure that all relevant or required items are covered by the letter. For more information regarding auditor’s comfort letters, please see our publication “Frequently Asked Questions Relating to Comfort Letters and Comfort Letter Practice.” CONTROLLING YOUR SHARES AND LOCK-UPS To provide for an orderly market and to prevent existing stockholders from dumping their shares into the market immediately after the IPO, underwriters will require the company, as well as directors, executive officers, and large stockholders (and sometimes all preIPO stockholders) to agree not to sell their shares of common stock, except under limited circumstances, for a period of time following the IPO (typically, 180 days), effectively “locking up” such shares. Exceptions to the lock-up typically include issuances of shares in acquisitions (typically subject to a cap) and for equity-based compensation awards. Stockholders may be permitted to exercise existing options (but not to sell the underlying shares), transfer shares to family trusts, and sometimes make specified private sales, provided that the acquirer also agrees to be bound by the lock up restrictions. These lock-up exceptions will often be highly negotiated. Note that, in an UpREIT structure, the OP Unitholders may also be subject to the lock-up agreement, but they may also be subject to a longer holding period before they can tender their OP Units for redemption as a result of the provisions of the operating partnership agreement. 17 | 2024 Guide to REIT IPOs and Listing Transactions
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