Deutsche Bank Aktiengesellschaft (DBK) Earnings Call Transcript & Summary

I can see the number of participants joining us is increasing. So I shall kick off the panel. Welcome to the second of our 2 panel sessions today. My name is Joe Oakenfold from Deutsche Bank's Depositary Receipts team. And for all of you who made it to the end of the day, it's my pleasure to welcome 3 speakers to the virtual stage. We have Michael Bison, Partner at Goodwin's renowned Life Sciences practice space in Boston. We have Jennifer or Jenny Harper, Capital Markets and Advisory partner with PWC based in London; and Patrick Hughes with NASDAQ's -- the director of NASDAQ's EMEA advisory team, also sweltering away here with me in London in the 30-degree heat. So slightly different is this to the morning's panel. We thought we'd give a breakout panel session with a series of 10-minute quick talks from each our speakers on topics of interest to international companies looking to access the U.S. markets. Now each speaker will directly hand over to the next, but please feel free to post your questions as you think of them. And we'll do our best to answer them at the end of the session when we'll break back into a more traditional panel format and discuss some of the questions and the issues that have come up. So let me invite Michael Bison from Goodwin to give his talk on what it is to be a foreign private issuer. Michael?

Great. Thank you, Joe. Welcome, everybody. So first of the quick hits, I thought I would start today with some discussion about a kind of a threshold issue that we often discuss with companies contemplating a new listing. And Marissa, if you can kind of tap down a couple of slides, maybe start with the next one. We're often asked, talk to us about the filing regimes that are applicable -- that will be applicable to us when we complete our NASDAQ listing. And that's really predicated on whether or not you qualify as what's called a foreign private issuer, minus his foreign kind of perspective of the United States. And there are really 2 filing regimes that are applicable to issuers on the public markets in the U.S. I'll refer to those as a domestic baseline filing regime. And then there's a filing regime that's applicable to foreign private issuers, or FPIs. FPI is at a high level. They enjoy significant benefits from a securities law perspective, including streamlined disclosure requirements. We have much more flexibility in terms of how a financial reporting is conducted. You don't have to provide quarterly financial statements, for example, only 6-month numbers and an annual audit. And you can rely on home country corporate governance requirements. So it's important to sort of understand that. And it's also important to understand that there are implications to those things from a shareholder relations perspective, from an investor expectations perspective, from a financing perspective and otherwise. And that's really, I think, where the art comes down to understanding the implications of being an FPI. And you can always -- by the way, if you are an FPI, you can always elect to take advantage of some of these benefits of FPI status on an a la carte basis. We'll talk a bit more about that in a minute. The other important thing to recognize is it's not a static test. Foreign private issuer status is a test that would relatively be made on an annual basis. There's a test that's made. I'll walk through the criteria for FPI status in a minute. But that test is conducted every -- at the end of every second fiscal quarter of every year. So sometimes, the challenge is you might be on the borderline of qualifying for FPI status. You anticipate pretty quickly, particularly after the NASDAQ listing, of losing FPI status. And so you might actually decide to go ahead and file this domestic issuer at the get-go. So understanding this requirement is a threshold and important issue. And so that's what I'll talk about in my session. Next slide, please. So in brief, this is the test. There are -- it's two-pronged. So it's important to remember, sometimes people get confused by this. It's two-pronged. So the threshold prong is more than 50% of your outstanding securities are held by U.S. residents. If you don't satisfy that test, you're done with the analysis. And oftentimes, at least as a threshold matter for a European biotech company, you're not there yet. Primarily your investors are local investors, and so you're likely to be less than 50% U.S. But of course, the whole purpose of the U.S. listing is to get more U.S. shareholders and particularly after you do -- might do a couple of follow-on round of financing, you may quickly trip that test. And so that's where the second prong kicks in. Any of these 3 subcategories, together with the 50% of the test, would cause you to no longer be a foreign private issuer. So the first would be a majority of your executive officers or directors are U.S. citizens or residents. That's usually the hardest one for companies in your circumstances. The other ones are 50% of your assets being in the U.S. or your business is principally administered in the U.S. As I mentioned before, the test is conducted -- it's conducted initially as a threshold matter, 30 days before your filing of an F-1 registration statement, but then subsequently, the last day of the second fiscal quarter of every year, as I mentioned. And importantly, because -- I mentioned this last point because we've worked with a number of issuers who are contemplating a multitude of strategies for liquidity and might include a dual-track M&A or IPO process. It might include a reverse merger process. I know there are a number of companies out there that are actively pitching themselves as a reverse merger candidate. Really important to understand that if you do a reverse merger into a U.S. issue-listed company, you will not qualify as a foreign private issuer. You will have to satisfy all of the requirements of the domestic issuer status. Most importantly -- and we'll get to this in a minute, most importantly, would be the requirement to file U.S. GAAP. So important thing to think about if you're thinking about a reverse merger. So if you can go to the next slide, please. Just real quickly, the benefits of being a foreign private issuer, you don't have to provide quarterly reports on Form 10-Q, you would have to file a 6-month review, P&L and balance sheet, but you don't have to file quarterly reports like domestic issuers do. You don't have to file current reports on 8-K. There are some domestic reporting requirements under what's called Section 16 that requires real-time disclosure of trading by officers and directors and 10% shareholders. That would be required. Part of that Section 16 regime is a required disgorgement of short-swing profits. So those are opposite way transactions during a 6-month trading period. You actually, as a matter of U.S. law, would be required to disgorge any profits that you make. So foreign private issuer status, that's a good thing to be exempt from. Regulation FD, which relates to things for a fair disclosure related to your public companies' interactions with analysts and other capital markets participants. U.S. proxy rules, more robust executive disclosure requirements would be applicable to a domestic issuer and so on. So those are some of the benefits. Next slide, please. This is a really key one to understand. If you're a foreign private issuer, you have the benefit of really choosing the GAAP that you choose. You could elect to file in U.S. GAAP. And that actually might make sense if you think you're going to lose foreign private issuer before too -- status before too long, like we've represented companies that anticipated losing FPI status relatively early on in their status as a public company, but they figured they might as well retain some of the benefits of FPI treatment for as long as they can. But because they didn't want to have to flip to U.S. GAAP when they lost that FPI status, they filed initially as a U.S. GAAP, even though they could avail themselves of the flexibility of FPI status, which includes being able to file an IFRS, which is most typical, or you can file in local GAAP with reconciliation to U.S. GAAP. Most biotech companies will be -- were qualified as an emerging growth company, and emerging growth companies that are FPIs only need to provide 2 years of audited financial statements. So that's a good thing. And the staleness rules are also more relaxed, as I mentioned, for an FPI. Next slide, please. Yes. So this is more detail on the FPI status. And I think I'm going to move along here, so we don't get too far behind. But -- so the last thing I want to talk about is just, does anyone really care about this because this comes up a lot. In our experience, the bottom line is investors really don't care. They don't care if you're an FPI. They don't care if you're a foreign or domestic issuer. Importantly, I would submit, they don't care so much whether or not you provide full-blown quarterly financial statements on a Form 10-Q, like your domestic counterparts might. Many FPI companies elect to provide capsule information on a quarterly basis. So that would be essentially selected financial data without a full P&L, without a full balance sheet or footnotes and kind of the MD&A type disclosure that you would have in a typical quarterly report. And so many FPI, particularly for a pre-revenue biotech company, really like to have the flexibility to kind of pick the type of disclosure that you provide right at the outset and rely on the added flexibility that you have as an FPI. And as I said before, you can always voluntarily elect to provide more disclosure if you want to. FPIs actually can, if they want to, voluntarily file 10-Qs with a full disclosure. So if that ultimately becomes something that you find is important to investors or investors would like to see, depends on the particular circumstances of the company, you do actually have that flexibility. So one nice thing about it is, it's not all or nothing. You can sort of select what you like and what you don't like about either filing regime and select it on an a la carte basis. So I guess, really, with that said, I think I'll pass along to my colleague, Jenny Harper. I think, hopefully, I didn't step on too much of your section here, Jenny, and welcome questions if there are any questions from the group. So thanks, everyone.

Great. Thanks, Michael. And no worries. We give a little bit of legal advice from time to time, mainly around FPI status. So it's a great point that you raised. And if we move into the first slide, Marissa, my one and only slide. I did it all in one place in the spirit of insightful brevity here. On the right-hand side, we've got just a little graphic. And what we always tell our clients when we are talking to them about you're preparing for an IPO, IPO readiness, it's not just about going public. It's about being public. And you've really got to look at where you want to end up and kind of move backwards from there and understand these time scales. It can be anywhere from 12 to 18 months to really prepare for an IPO. And as Michael said, 2 very key things: FPI status and ability to qualify as an EGC. That -- those are top of our list, along with some other early considerations down there on the right. I won't go into those in detail, but if you see any that catch your eye, please do submit a question. So for this short session, I thought I would just go for sort of a top 10 sound bites on things we run into, trends, common practices and debunking some of the myths. One is it's very important to involve your auditors early. There are a lot of items that have long lead times here. And certainly, by the time you are ready to kick off your IPO process and have your org meeting and everything else, there will be general expectation that your financial statements are just about ready to go into that SEC filing. There are a number of other issues around kind of getting the auditor ready for a U.S. IPO. The independence rules are a little bit different from -- in the U.S. as opposed to what might have been followed in your local territory even for public companies. And sometimes companies might decide that given how much you're going to be working together and preparing to be a public company, it might also necessitate a change in auditor. And that's really a function of relationships with your existing auditors and ability to do the job. The second item, finance team resource. Look, it is a great idea to hire additional advisers. And particularly when you might have a very small finance team that is very common with early-stage biotech companies. But I wouldn't wait too late to build up your internal finance function. That doesn't mean going out and hiring 10 people. But a couple of individuals that are going to be there through the long haul, that will motivate your employees. They will grow and evolve through that IPO process. So -- and that's why I say judiciously, again, not to go out and hire the masses, but don't underestimate the burden on the finance function and the value in building up and motivating your team early. Third item, understand that a new audit will need to be performed on your existing financial statements, plus auditor reviews over any interim financial statements that are included. So even though you have a perfectly good opinion on your IFRS accounts, even if you're a public company somewhere else, there will be -- it doesn't mean you're starting from scratch on the audit, but there will basically be a new opinion and your auditor will have to go back and perform additional procedures, which includes walk-throughs of your controls and processes. And often -- and if you were private and going public as opposed to already being listed somewhere, the materiality will decrease, meaning your scope will increase to that of a public company audit. And so there could be additional testing to be done. Number four, be open-minded about changes to your existing historical financial statement, again, whether you're private or public. Going back and performing that re-audit might result in changes, and that can be addressed separately in your previous statutory accounts. It gets a little more complicated if you're a public company elsewhere. But you and your auditor and your advisers will be looking at these accounts with an SEC lens. And sometimes is the case, there might be a treatment. Even though if you're on IFRS and you're going for IFRS as a foreign private issuer, sometimes the SEC takes quite fixed views about things or has a specific position on things where we might be more in practice, a variety in practice across other jurisdictions, even though there's only really meant to be one IFRS. So it's just a reflection and knowing that your accounts might be modified somewhat. Directly related to that, ensure -- number five, ensure disclosures about your accounting policies, critical estimates and judgments are very robust. I mean generally speaking, you'll need to be ready for a lot more disclosure and including due diligence. I mean we won't get into this here, but the auditor comfort letters, disclosures in your MD&A, more detailed about your cost structure. Often, even if it might not appear in your first F-1, sometimes the SEC will come back and ask for more detail. Number six, don't underestimate the amount of review time across the company and your advisers, including your auditors, right? So there'll be a number of layers of review, and it should be very important to you for your governance as well because, again, it's not just marching through the IPO process, but being prepared for an ongoing public reporting line. Material weakness. You don't have to be on Sarbanes-Oxley 404, which is your internal controls over financial reporting. You don't have to -- you're not in that regulation until your second year. But often is the case where the re-audit can sometimes yield controls issues. If you have a material weakness, it would get disclosed in your risk factors. And over 1/3 of all public companies going to the market to IPO are reporting material weaknesses. So it's not something to panic about, but something to be aware of. Be prepared for stakeholder management and communication and look to correct it on a go-forward basis. Get to know the SEC. Make a good first impression and take good care to get that F-1 -- that first F-1 land it really well with them. It will serve you well in an expedited IPO process, getting them on side. Number nine. Number nine is the kitchen sink, IPO, M&A, pro forma, 305, lots of acronyms and, frankly, too much information. There are a lot of rules to understand. One of my big comments here is the SEC has done an incredible amount to stimulate capital formation and make it easier for companies to go to market. Michael mentioned we're seeing a lot of M&A trends, and they've done things to reduce the number of periods required for significant businesses and ease those thresholds. But a key takeaway is if you do anticipate some form of M&A, you'll have to report on those businesses if they are significant. So always keep one eye to what perimeter changes you might be having and factor reporting on those other entities into your IPO plan. And lastly, I would say, conduct an IPO readiness exercise. It will serve you well in many ways. It will help inform you about items 1 through 9 above, and it's a great tool to help you understand the cost, the effort, the lead times, both for management, the Audit Committee and the Board in determining if it's right for you, what kind of timing it will require and is meant to kick out a helpful road map to help you on your way to IPO. So conscious of the time. And with that, I'll hand it over to Patrick.

Great. Thank you very much, Jenny. Very interesting indeed. So hi, good afternoon. Good evening for some of you, I guess. I'm Patrick Hughes from NASDAQ in London, representing our NASDAQ IR Intelligence business but also our Corporate Services business, where we really are a partner with companies, from private companies to companies thinking to IPO, of course, to after you're listed. We're a partner and an advocate for publicly listed companies. In particular, we provide a suite of analytics and tools for IROs and governance professionals to help them with these strategic outcomes and enhance shareholder value. So I was here to ask -- Marissa has asked me and the team's asked me to speak about some investor trends that we've seen across our -- the companies we work for across the U.S. and Europe. So Martina, maybe you can jump to my first slide, and I'm happy to share some trends of what we're hearing from investors, what we're seeing from the markets and this sort of exceptional time that we're all living in. I've never done so many Zoom calls or meetings. Everyone is getting a little Zoomed out, for sure. But it is an efficient way, on the other hand, to share insights and trends and to also engage with investors. So I think here, it's also important to sort of take stock and maybe just take a step back from some of the negative headlines sometimes and think about where we are. And actually, there's a positive spin, especially for this sector, which is a sector I'm quite passionate about and the companies I support across Europe, the health care sector. So certainly, the health care sector and biotech is not sitting in the same position, as you all know on the call, as some of the companies we support and partner with in other sectors across Europe. So looking at the health care sector has eked out on sort of aggregate, a bit of a positive return so far year-to-date. But there has been a rebound, in particular, in the U.S. market, which it will be interesting to see how that pans out in the medium to longer term. As you can see, the health care sector and the technology sector have been outperforming so far year-to-date. And then, of course, the U.S. NASDAQ 100 is sort of taking the lead in the indices I'm showcasing here on the right-hand side. And the biotech index also performing very strongly in the first half of the year. And of course, this sector is in particular focus because of the focus that we, of course, not just investors have, but the whole world has really on the biotech sector and the hopes of -- in support around the COVID crisis. So interesting to sort of take a step back here, but I also think it's interesting to frame it in the view of what investors are thinking about. And I think that the headline from, well, some companies going bankrupt today or other hedge funds struggling or index funds really struggling. But I think that this also has this opportunity. The market dislocation that we've seen at the moment is a real opportunity for stock pickers and one that we haven't seen for the past few years, where a lot of the money we look at -- at NASDAQ, we look at a lot of the fund flow money where money is flowing and talk to our Investor Relations clients around that, to explain trends in their shareholder base. But over the past few years, money has really been flowing into index and ETF funds predominantly. And this market dislocation, I think, has created an opportunity for stock pickers to finally have, well, a really good opportunity to outperform. And there are some amazing biotech and health care funds that have done really well, but there's also some ESG funds and some stock picker funds that are also outperforming based on the fact that this market dislocation creates an opportunity. And I think -- most recently, I was on a webinar, it was a long-only London investor who was talking about -- London-based investor, talking about how this market dislocation. He had been sitting on the sidelines for years, studying companies who have just been too expensive and how this market dislocation created an opportunity to build up substantial stakes in those companies. So I do think -- if you watch CNBC, and it's -- the volatility is unprecedented, and it's very difficult for IROs in these times to, in some cases, project in certain sectors where we'll be in 3 months or 6 months. But certainly, the market dislocation has also created an opportunity. So let's move on to my next slide, Martina, and talk a little bit about what we're hearing from investors in our conversations with them. So at NASDAQ, we're regularly speaking to the buy side, in particular, with our Global Perception practice where we work for many, many companies to support them with perception studies. So I think it's interesting to kind of frame what we're hearing from the investors around this new virtual landscape and things certainly have changed. I was also on -- we hosted a -- NASDAQ hosted an Investor Relations global forum, which perhaps some of you listened into yesterday. It was -- or yesterday and the day before, and it was interesting hearing from the buy side as well as the sell side, saying everyone, we do hope it will get back to normal, and we can travel and everyone can meet each other again because there is that sort of human touch. And certainly, I think one conundrum for the buy side is -- and actually, interesting for those of you on this call, is around your new investments, right? I mean the buy side, they do like to meet management, Investor Relations as well. They want to meet management, especially when they're considering building a stake in a company they don't already hold. And they want to see your body language, they want to meet your management, look you in the eyes, as they say. So I think that, that's a challenge at the moment, especially for the investors who don't already have a position in the company. But clearly, there's -- the buy side has really shifted, right? There's a virtual approach. There was a survey out earlier this year of Investor Relations officers with more than 80% of them, I would think it's more like 100 now, indicating that they'll be doing more virtual road shows in the future. So that's clear. The other thing that's very interesting is to look at some of the trends around the IPO market, which has certainly really picked up. Recently, there's been -- this past month or this month, there's been a real uptick in the IPOs. Some very successful companies going to market on NASDAQ in the U.S. So that's interesting. And certainly, the road show process has become more efficient. Although I think we all miss seeing people face-to-face sometimes, certainly, the efficiency around the IPO process and the road show, the time that it has -- and also the ESG elements that it might have taken a few weeks, in some cases is being boiled down to a very efficient roadshow process ahead of the IPO in a week or less. So that's a real dramatic change, I think, that's come about as part of this crisis. But I think in terms of the other things -- you're hearing from buy side, well, a couple of things. One is that the buy side is certainly -- the buy side that we speak to are leveraging the sell side less frequently. That was a theme at the Investor Relations forum that we hosted at NASDAQ the other day, that really the buy side is more receptive than ever to direct issuer or outreach. So that's a key theme for companies who are already listed. So engaging directly with your investors and prospective investors, and in some cases, especially if you're a smaller company or a mid-cap company, you may be doing that partly with the sell side but also [ increasingly ] directly with the buy side, who have been increasingly building up these corporate access teams themselves, especially a lot of the long-only buy sides. So that's an interesting trend. And so I think a couple of other things. I can -- the other theme which I'll touch upon is maybe around conferences. But maybe about what we're hearing from investors, I think that, that was something I was asked to talk a little bit about. So I like this bubble we have on the right-hand side of the conversations at NASDAQ. Our perception team has been having with investors over the past few months and really representing hundreds of investors, our conversations with hundreds of investors are predominantly skewed towards the U.S. with our conversation with U.S. investors. So investors have been really taking a very new focus, like a -- clearly capital allocation. That's a key topic with a real focus on resiliency of your business. So the strength of the balance sheet, levels of debt, operating cash flow and increasingly sustainability. So I know there's been a number of -- we've actually been engaged with a number of -- or hosting a lot of thought leadership events around ESG. It is sort of increasingly even -- especially in the COVID crisis, the sort of hot topic. A lot of companies are having to get up to speed very quickly around ESG. In particular, I think the statistic I saw was something around 80% of companies in Q1 talked about the S factor in their Q1 results presentation. So I mentioned S, so social. Talking about their employees. So how are -- have you furloughed employees? Or have you laid off employees? Or how are you engaged with your furloughed employees? Because clearly, if and when markets rebound or -- you're going to need to get those employees back. So I think workforce safety is -- patient safety is obviously a crucial topic for this sector. So I do think ESG, especially governance, obviously, has been -- it's always been a big G but increasingly, S and E are increasingly important topics for the buy side. And I think the other topic around ESG, which I'll just touch upon quickly, I could talk easily for 20 minutes on ESG, is that investors are increasingly using ESG as one of the most important screens or just as important as financials, right? So resiliency and balance sheet and all those things, but ESG, integration of ESG components into their investment decisions. And these are not just the ESG thematic funds, who are a very interesting category to talk about because they're getting a lot of the new money. But these are the long-only investors, the T. Rowes of the world, and others who are integrating DWS, a lot of the European investors are well advanced, but a lot of the U.S. investors as well. They're using it to measure, of course, risk in the portfolio, but also to identify outperformance. So ESG strategies is another kind of key topic that I think investors are thinking about. And then I think, maybe lastly, I talked a little bit about direct outreach, key topic there, as again, more and more corporates are engaging directly with investors. I think the other areas around conferences, I'll just touch upon it because of this sector has a lot of conferences in it. And I think that it will be interesting to see how the conference landscape evolves in the next sort of quarter. I think when the COVID crisis hit, clearly, there was a lot of conferences and a lot of the same -- I think now that everything is virtual, everyone can attend every conference. If it's in Denver or Florida or Paris or London, you just need a phone or a laptop. So I think that everyone sort of attended every single conference, and there's been a bit of overboarding of attendees from -- and also from a corporate perspective, it's very -- it's the same investors and a very similar message. So there's not a lot of value added. So we'll see how that evolves. And I think that there's going to be a lot of onus to scale down and sort of provide more value-added conferences. But maybe as a segue to the next slide, I do think corporates are thinking about the second quarter now and they're messaging around that moving forward to the sort of new normal, so I think that's another key topic we're hearing from investors. And maybe just lastly, some headline statistics from NASDAQ and our conversations with investors in the buy side. So I think interestingly, we have been surveying the buy side and asking them, again, a little bit around the opportunity the market dislocation presents, that the buy side are absolutely still looking for new investment opportunities. They have not just sat still and only focused on their current portfolio. So 80% of investment professionals saying that they have altered their capital allocation preferences since the COVID crisis. So that's very interesting. Clearly, again, speaks to how companies who are already listed, but also certainly pre-IPO as well the importance of engaging with investors in this current environment. 40% of investors told us that they have altered their multiple, that they're willing to pay for stocks relative to the market. So that's interesting. Clearly, it's not an overwhelming majority. So certainly, sticking to some of the fundamentals there. I think that's very interesting. And that 88% of investors told us that they are initiating new states in companies since the onset of the pandemic. So again, interesting to sort of -- the world is carrying on. Certainly, investors are looking for new opportunities. Maybe that also explains the IPO market heating up. There's a sort of maybe a little bit of pent-up demand there as companies have been going to market. So I think with that, I probably have used up my 10 minutes, but happy to take any questions that anyone has on any of the themes I've covered, and I hope that you found that interesting.

Thanks very much, Patrick. Thank you to everyone. Just while we wait for some questions to come in, a few thoughts from myself. First one back to Patrick, I suppose. Is this change in buy side behavior and their allocations, is this here to stay? Or is this a pandemic-related passing phase?

Yes. Well, I mean, I would say, to some extent, it's always been that case, to some extent. I think the active buy side is always looking for alpha, and so they are looking for opportunities that can outperform. I think what's the new -- what's new is, one, well, all of a sudden, if you're just an index investor investing in, I don't know, yield or whatever, certainly, there are some sectors that have kind of maybe a bit out of flavor at the moment and others like tech, health care interesting that are certainly very much in flavor. So I do think what's new is that is a little bit what I spoke about, the active buy side, in particular, a lot of them have been really struggling. I think the statistic that I saw over the past kind of couple of years, and I'm just rounding this out because I can't remember the exact number, but some of the headline numbers, the number of actively managed funds that beat our benchmark, last year, I think it was like 25%. So like, usually, it's like 25% or 30% per year. So it's relatively low. So as you can expect -- I think what's interesting is, will some of these actively funds be able to beat their benchmarks now with the relatively high correlations. Certainly, in March and April at the sort of height of the crisis with many indices, obviously, mass having significant downturns. That's new. That will be interesting to see. So will the stock pickers be able to outperform. ESG, that's again, the hot topic, increasingly important. Companies, I would even think in pre-IPO discussions, will be getting more and more questions around the S. E, of course, depending on -- is more a factor more for certain companies in certain sectors, maybe not if you're so much a biotech company, but patient safety, of course, super important in clinical trials, things like that. So that's new. And then the last one that I think is interesting to talk about is hedge funds, which I could talk again in 20 minutes about hedge funds. But interesting to see how the hedge funds will cope in the current environment. There's been some turnover at firms like Citadel. Some of the other hedge funds have been in the headlines, facing some outflows, in particular, in the first quarter. So that will be another interesting category to watch. In particular, they provide a lot of liquidity [ there ] always you put hedge funds and certainly in one bucket. So I think that's the last category to watch. A theme to watch this year is how will hedge funds do.

Okay. Thank you. I know we've got a couple of questions. One of them -- one is a doomsday question, perhaps maybe for Jenny. What happens if you lose your FPI status after your IPO?

Okay. We just got there. I mean it's interesting. Michael touched on it a little bit earlier. It's definitely something to consider when you're looking at those criteria for qualifying as an FPI. Losing FPI status is rarely a surprise, and it is often within the company's [ gift ]. So just careful planning should be done to know when you might flip and there might be a reason, increasing your U.S. investor base and attracting certain investors that for whatever reason are not permitted to invest in foreign private issuers. But because it's rarely a surprise, there is long lead time to prepare for that, which means you're going on to domestic forms. You have to convert to U.S. GAAP if you've chosen to report IFRS. And that test is done at the end of your second quarter. And the year that you disqualify, that second quarter that you disqualify, literally the following next fiscal year, so 6 months and 1 day later, the company has been expected to report on those domestic forms. But usually, again, you'll have good advance warning, and we work with a number of companies that have either by default or design lost FPI status. And so the key is planning and good long runway and help from your lawyers as well.

Yes. I was going to bring Michael in there as well because it's a similar vein question this time before, I suppose the IPOs. What's the implications of not being an FPI and not being able to provide quarterly financial statements on future financing transactions and giving comfort to underwriters?

Yes. So that's a great question. It comes up quite a bit. In fact, I was on a kind of an organizational call for an IPO, and this was exactly the discussion that the company was having with the advisers and with the underwriters. I'd say just kind of 2 ways to answer that. I think from an investor perspective, and basically, your ability to raise capital, putting aside the legal [ requirement control ], there's no impact, right? Because particularly for a pre-revenue biotech company, no investor is making that investment based on the detailed footnotes and your quarterly financial statements, right? To the extent there's any relevant information, it can be provided in what we call capsule form. So maybe it's just your cash on the balance sheet. You don't have to -- they don't necessarily -- investors would not necessarily require a full blown balance sheet or P&L. So from a practical perspective, I don't think there's any impact. From an execution perspective, there is something that often comes up, and I'm sure Jenny has opinions on this as well, I'll give her a chance to jump in here in a minute, but it has to do with what's called the comfort letter. So to -- a little bit about what comfort letters are. So when underwriters underwrite an offering, they can avail themselves of certain protections under the U.S. securities laws, provided they conduct a customary due diligence process. And so that relates to both operational matters, clinical trials, et cetera. That's what drafting sessions are for and diligence requests. And then with respect to financial statements, what a customer would rely upon is a comfort letter, and that comfort letter is a document that's delivered by the auditors where they provide certain levels of assurance as it relates to the financial statements that are included in the prospectus for the offering. The issue comes up that under customary practices, the underwriters are limited and the level of comfort that they can provide if the last balance sheet that was provided is more than 135 days from the offering. So you can imagine a situation where you are late in Q2, you haven't provided a first quarter update because you're a foreign private issuer, you're well beyond 135 days. You can't deliver the customary comfort letter that underwriters typically want. Now I would submit, as a lawyer and not a banker, that's a bit of a tail wagging the dog because if you go back to first principles, comfort is merely a mechanism by which the underwriters can conduct -- satisfy their due diligence defense under the securities laws. And the reality is, there's a number of ways that bankers can conduct that diligence. And so for example, sometimes, quite often, what we'll see is to the extent there's a gap beyond the 135 days, the CFO will provide a certificate, and that will supplement the level of comfort that the auditors can provide in that comfort letter process. So now this does -- to be fair to the banks, this varies by the banks. It's not necessarily up to your relationship banker, who probably doesn't really care much about this. This is probably above his or her pay grade and has more to do with the legal group or the compliance group or the investment committee at the bank, and it will definitely be fact-dependent. But I guess my advice to those of you, particularly CFOs that might be in the audience that are concerned about this, I would pressure test. Don't let the bankers sort of tell you, well, in order to deliver comfort, you need to provide full-blown quarterly financial statements because as I said, that's a bit of a tail wagging the dog. I don't think that you should go public and fall into a quarterly reporting cadence, unless it's the right thing to do for the company. Unless you think, because of the unique circumstances of your company of the expectations of your investors, you need to provide that level of quarterly information, whether that's fine, of course. But there are other ways around satisfying that comfort level requirement that bankers sometimes. So they would definitely have any kind of registered financing following the IPO. But I can see, Jenny, I'm sure you have thoughts on this as well.

Well, some thoughts. Yes. Thank you, Michael. I mean I can agree with much of that sentiment. I would bring also an additional twist to it. And what we tell our clients when they're preparing for IPO is plan on preparing quarters, preparing them, not necessarily reporting them. You want to keep your IPO window open as long as you can, and you don't want to sort of stub your toe on passage of time and miss a good market window because you needed to get your accounts updated for the IPO. And again, that's to satisfy the diligence requirement because the FCC has more relaxed requirements for foreign private issuers. So it's the diligence, 135 days, that drives that timetable. That's in the IPO. Then when you're on that fast-moving treadmill as a U.S. public reporter, keep your options open. Again, the luxury of being a foreign private issuer means that you have a choice and the option to report quarterly from an accountant's perspective and controls and governance and all of that. It's also a good practice to prepare them on a quarterly basis. If you got a situation, you maybe had a material weakness, and you really want to try and rectify it and remediate it by the next year-end, preparing and reporting quarters -- or preparing quarters gives you more opportunity to make sure you can see those systems and controls operating so that you can remedy it. That's one benefit. And then the other benefit, of course, is keeping your flexibility to tap investors in the capital markets on a frequent basis. So again, kind of back to the -- you could report capsule data, if you wish, and you can sort of keep that quarter that you prepared really behind the veil, not necessarily report it, but robust practice will help you with speed to market and speed to compliance and other things.

And are there any exemptions for being an emerging growth company to the reporting requirements? What are the implications if you're going under that banner?

Why don't I start again. I think Jenny will probably want to clean up -- back clean up here. So I think probably, it's not -- these are the 2 acronyms that you'll hear a lot, EGC, emerging growth company; and FPI, foreign private issuer. They both essentially allow exemptions to a variety of things under the U.S. securities laws, all with a view towards making it easier for smaller companies to access the capital markets. I think probably the key thing from an emerging growth company perspective has to do with internal controls and procedures. Jenny mentioned this. So again, I'll go back to first principles. Every public company, whether you're an EGC or not, is required to have satisfactory internal controls and procedures over financial reporting. So that's about essentially making sure the numbers are correct and disclosure controls and procedures. So that has to do with making sure that there is timely disclosure of material information that would be relevant to investors in making investment decisions. So that's kind of the threshold. That's the cost of entry. The trick when people talk about internal controls and procedures in Sarbanes Oxley, which was an act that -- a U.S. act that implemented a lot of this procedure, is whether or not the auditors have to audit and offer an access station as to the sufficiency of your internal controls and procedures. And that is quite an exercise, as I'm sure Jenny can do a much better job than I can of explaining. That's quite an exercise to confirm those controls and procedures and for the audit firm to deliver that access station. You have 5 years if you're an emerging growth company, which I'm sure is explained what it is. It's -- essentially, if you have less than $1 billion of revenue, you'll be an EGC. So I think for purposes of this audience, everyone would safely satisfy that requirement. And if you are an EGC, then you have 5 years before you would ever have to deliver. Unless your market cap exceeds certain thresholds, you -- which is an important caveat, you'd have 5 years before you have to deliver that [ auto draft citation ]. So maybe I'll pause here and see if Jenny wants to add more. But that, to my mind, is the key benefit of being an EGC.

It is a benefit, but it comes with a bit of warning. When the Jobs Act that gave this benefit first came out many, many years ago, lots of companies celebrated. We don't have to have the auditor at a station on management's report on internal controls, but management still has to report on internal controls in its second annual report. Management also has to provide what they call Section 302 and Section 906 certifications, the CEO and the CFO, that basically does the accounts are free of material misstatement and that the controls and procedures are operating effectively and that the overall SEC filing is compliant with SEC regulation. So those are pretty big and important certifications. And that starts with the first annual report for the 302 and 906 that the CEO and CFO sign. And the second annual report is the management report on internal controls. I mentioned earlier that when an auditor has to go back and perform a PCAOB, the U.S. audit under the auditing -- U.S. auditing standards. They have to do certain procedures that walk through and document their understanding of management controls and processes. So the auditor is not required to go looking for a material weakness. That's what happens when they have to do their bit on 404, call it, 5 years after your IPO. However, if the auditor becomes aware of a significant control matter that could rise to this level of a material weakness or, in fact, if the company identifies one, it's still got to get reported. So there's very, very good news that, that auditor reporting element of the 404 internal controls doesn't yet enter the system. But by the same token, there is still focus on it, and it's something that management has to keep an eye on. And again, the auditor has to report if they find it. So I mean, again, it's really all in the spirit of companies making sure they are putting that focus on the finance function and the ability to report their information accurately and timely.

Jenny, I would just elaborate on that, but I think it's fair to say while you do have -- as I said it before, you have to have internal controls and procedures, management will eventually have to deliver its own report, the level of work and maybe infrastructure that a public company would need to develop and build out of its finance team is much more significant when you have to support an access station process. So I think from that perspective, [ certain companies ] are cash strapped, right? They don't have the capital. They have really thinly staffed finance teams. And the idea is that this is a capital raising event, maybe we'll do a follow-on and trying to kind of grow into that kind of level of sophistication and maturity for more mature public company, reporting company.

Yes. I would agree with that, for sure.

Excellent. Thank you. We don't have any more questions, but I do like to leave panelists with final thoughts. So springing this on you, what would be your one piece of advice for issuers looking to come to market at the moment or for you, Patrick, looking for investment in the market?

Okay, so I'll go first. I would say -- well, I think Patrick did a good job of laying this out. I mean those statistics are pretty eye-opening. I'm happy this worked in an industry that was one of the only industries that seems to be showing positive results in this environment. So I guess my parting thought would be the markets are open in the U.S. They remain quite active. This is -- remains a healthy sector. And I guess, from our perspective, it's consistent with what we hear from our investment banking friends and other participants in the sector is that no real reason to think anything will change. If anything, I think this COVID crisis has really demonstrated the real value that the health care sector and biotechnology companies bring to society and the real benefits and value that's there. And so if anything, I think we remain really optimistic and excited about the opportunity. And so from a parting thought perspective, don't -- you might be thinking about trying to pick the perfect window. Our advice always is, don't overthink it. Don't wait too long. You can always -- if you're ready to go, you can kind of have things sitting on the shelf, if you will, and pick your spot to file your -- to flip the deal public and take -- and launch your IPO. It's hard to turn on a dime when that window is there and you haven't done that early-stage work. So work with your advisers. It's a bit of a self-serving statement, I suppose. You have a bunch of advisers here on this call. But I think the point is legal, accounting, NASDAQ, ADR facilities, there are a lot of people out there that are ready, willing and able to speak with you about your IPO process, help you prepare, give you food for thought. And eventually maybe [ work ] up for a meeting and be in a position where you could take -- access the capital markets on a moment that suits your particular circumstances, your milestones, internal milestones, et cetera. So start early, would be my advice.

I couldn't have said it better. I mean from my end, it's all about readiness for whatever your strategy may be. Again, you may wish to keep as many options open on what type of financing you obtain, whether you are interested in looking at M&A ahead of the IPO or you may want to change the order of that and go for an IPO first and deal with finding a strategic partner, M&A partner later. I think the key is plan out what those eventualities might require so you can understand how you best allocate your time and resource so that you're not in some kind of scramble when those windows open. It's one of the most exciting things you can do, I think, and your teams and your employees and your company will benefit from it. So put in a sensible time and investment where you can to prepare for that long road ahead, [ fighting ].

Yes. And I mean, I'll just chime in quickly. I think, Michael, you did a great wrap up there, indeed, and Jenny as well. I think the markets are open, and investors are clearly keen and interested in looking for opportunities. It's -- and certainly, for this sector, it's a great time to considering to IPO. I think the last thing that I would think that at least I spend a lot of time thinking about is that we're really, at NASDAQ, your partner for the long term. So we really are -- the IPO is an extremely exciting day for -- a huge milestone for companies and something my colleagues support or companies who list with us enormously. But I think we're really there for the long term, supporting you 6 months, a year later down the road as your shareholder base evolves and changes, and the company -- your profile, your company evolves and changes because I think that's when it also gets very interesting. So I'll stop with that.

Thank you. There actually is one last question came in just towards the end. So whoever wishes to take this one. So -- because it's an interesting one. Can you provide any examples of companies going to IPO without underwriter? Without an underwriter.

Yes. So it's a bit of a technical answer. So the obvious answer to that, the way people typically do that would be what is call a reverse merger. So private company merges into a public company that is -- maybe it was a listed company that has a failed asset or something. So it's sitting on a bunch of cash. And one way to do -- to get yourself public without having to do a traditional underwritten public offering process would be to merge into that company, get access to the NASDAQ listing, the cash that, that company has. And then oftentimes, that will be done with a concurrent financing, either -- a concurrent or a financing shortly after that transaction. There are also SPACs, special purpose acquisition companies, which have become quite active in acquiring private companies. That's another kind of flavor of a reverse merger. There's also something called a Form 10 process, which is even more rare than those 2, where you literally just file a registration form with the SEC and you voluntarily become public. That requires a bit of coordination with our friends from NASDAQ as to whether or not you satisfy the NASDAQ listing requirements as it relates to trading volume and market makers and other technical requirements. So whether or not there's an active -- the Form 10 process, there's -- I know there've been a few over the last 5 or 6 years. It's a pretty rare process. There've been a number of SPAC deals and a number of reverse mergers. So those are actually quite common. And so that's something you're thinking about pursuing. That's kind of the path I would encourage you to think about.

Excellent. Thank you very much. Obviously, from our perspective at Deutsche Bank, the ADR route is preferred. I just wanted to wrap up by thanking everyone on the panel for presenting to us today and also answering the questions. Everyone's got their contact details on the presentation, which I know will be recorded as well. If anyone wants to get in contact with us at Deutsche Bank, my name, [email protected] for any further information. Thanking everybody behind the scenes as well, one of whom is Thomas Hoffmann, from Solebury Trout, who I know wants to have some final words today. But for me and from co-sponsors and panelists, thank you very much, and stay safe.

Thank you, Joe. I just wanted to finish up and saying like 2-plus years ago, Markus Bauman from Goodwin and I had the idea of putting together a dedicated investor event for European companies and bridging together the next wave of opportunities coming out of Europe. And today was definitely a very, very interesting day, and I learned a lot. And while we would have loved to see everyone in person and had planned a great 2-day program with a closing bell at NASDAQ and a welcome reception overlooking Times Square, I think this was still an amazing event, and I want to thank our partners at Goodwin, Deutsche Bank and NASDAQ for supporting this day and make it another success. Please note all company presentations are already available through troutaccess.com and the panels will be available for replay starting tomorrow. We at Solebury Trout want to once again thank everybody for your participation and your efforts to drive innovations forward.