Regulatory Issues
An initial public offering “refers to the process of offering shares of a
private corporation to the public in a new stock issuance.” (Hayes,
2019). Going public, Fred’s Miracle Cough Syrup might face several
issues such as:
1. The embezzlement scandal related to Jane’s misconduct while
serving as the company bookkeeper.
2. Tammy’s sexual discrimination lawsuit related to hiring practices.
3. The reverse engineering and publication of the recipe by Bob.
The company has had several fortuitous events that helped their
company image. The first was that they were able to recover the
fraudulent checks and Jane sought out counseling for her gambling
addiction. However, the fact this situation was able to occur and go
undetected may still cause investors to shy away from the IPO. To
offset investor concerns, Fred and Sally should work with their new
accountant, Ted, to establish internal controls for record keeping,
reporting and cash handling that ensure transparency, accuracy and
will prevent future issues with fraud. Having an internal audit
conducted by an accredited firm to certify the accuracy of their
current financial records could further reassure potential investors
that they are making sound investment decisions. (Kubasek, Browne,
Herron, Giampetro-Meyer, & Barkacs, 2009).
The next issue would be with Tammy who was hired as a delivery
person for the company. When Jane’s position as bookkeeper
became available, she applied but was denied, and instead Ted, an
experienced accountant was hired. Tammy filed a lawsuit against
Fred and the company claiming sexual discrimination. This specific
claim falls under the Title VII of the Civil Rights Act of 1964, “which
prohibits employment discrimination based on race, color, religion,
sex, or national origin” (U.S. EEOC, n.d.). Tammy must be able to
prove she was qualified for the bookkeeping position while Fred and
Sally must have a valid reason as to why she was not qualified.
Because Tammy was a delivery person, she does not have any
bookkeeping background as far as it is known, therefore Fred and
Sally should be able to prove that Tammy was not qualified for the
position (Kubasek, et. al., 2009). In addition, because of past
experiences with unqualified and/or inexperienced bookkeepers,
Fred and Sally could claim they wanted someone with significant
accounting experience and/or expertise in auditing, which may not
have been the case with Tammy, in light of her most recent position.
Legal Test
To ensure that Fred’s Miracle Cough Syrup complies with federal
regulations, Fred and Sally must first file an S-1 Registration
Statement with the SEC. (Hayes, 2019). The S-1 statement requires
companies to provide information on the planned use of capital
proceeds, details of their current business model, competition, and
provide a brief prospectus for the planned security itself.” (Scott,
2020.)
Recommendations
At this time, I would not advise taking Fred’s Miracle Cough Syrup
public. The company should focus their energy and resources on
resolving the discrimination lawsuit with Tammy before considering
such a move. This will also allow time for the fraud issues with Jane
and Don to be sufficiently mitigated to alleviate any residual
concerns for security or fraud related to company records and
management from an investor’s point of view. Until then, Fred and
Sally can begin the transition from a Limited Liability Partnership to a
Corporation in preparation for the company going public. Fred and
Sally may also want to consider hiring a PR firm to start promoting
the company and their product. In this way they can attract the
attention of potential investors ahead of time. This would allow
qualified and interested investors time to monitor company progress
and perform due diligence so that once the IPO becomes a reality,
they are ready to act without hesitation.
References:
Hayes, A. (2019, July 29) Initial Public Offering (IPO). Retrieved
from: https://www.investopedia.com/terms/i/ipo.asp
Kubasek, N. et.al., (2020). Dynamic Business Law, Fifth Edition. New
York, NY: McGraw-Hill Education
