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Often in an IPO, outstanding debt or preferred stock will automatically convert into common stock either upon the effective date or completion (i.e., closing) of the IPO. Such conversions typically have a significant impact on an entity’s capital structure. The conversion of securities on either the effective date or closing date of an IPO cannot be reflected in the historical balance sheet. The security should be classified according to its nature in the historical balance sheet at such date. In the financial statements included in the IPO registration statement, the SEC staff generally expects the reporting entity to present an unaudited pro forma balance sheet next to the historical balance sheet to give effect to the assumed conversion of the security on either the effective date or closing date. This pro forma balance sheet should not give effect to the proceeds of the offering.
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