The staff of the Securities and Exchange Commission’s Division of Corporation Finance issues comment letters relating to registration statements and periodic report filings. This note examines the issues raised in SEC staff comment letters for IPOs relating to the valuation of equity awards issued to employees at a value that may be considered less than fair value (often referred to as “cheap stock”). Because valuing equity instruments that do not have an active market is quite subjective, often, comments are raised by the SEC staff in connection with the issuer’s IPO registration statement. The SEC staff focuses on the price variation between the fair value of the company’s common stock at the time of issuance as compared to the anticipated IPO price.
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