Trade Due Diligence in the Context of an IPO

By: Olga Torres and Camille Edwards
Date: 01/30/2024

Ensuring compliance with U.S. export controls, import regulations, and economic sanctions is common practice for companies that engage in international trade. These companies often have internal compliance policies and due diligence practices that help to monitor compliance for everyday operations. In addition, companies undergoing structural, or ownership changes often must conduct trade-related due diligence to assess compliance risks associated with a relevant target company. Outside of the mergers and acquisitions context, private companies also undergo structural and ownership changes when they become public via an Initial Public Offering (“IPO”). An IPO occurs when a privately held business sells shares of its stock to the public for the first time. While actions like reviewing the company’s articles of incorporation, financial records, contracts, and tax returns and filings are common steps taken when preparing for an IPO, considerations related to trade compliance are often overlooked. This article provides an overview of important trade-related considerations in the context of an IPO.

SEC Reporting Requirements: Trade-Related Risk Factors

Companies considering going public will be well-aware of registration and reporting requirements mandated by the U.S. Securities and Exchange Commission (“SEC”). In general, information about a company, including a description of its operations, line of business, financial conditions, and risk factors must be disclosed in a registration statement before an IPO takes place and in subsequent periodic reports once the company becomes public.1 Thus, extensive due diligence in preparation for an IPO is typically conducted to gain a complete understanding of the company and any risks, including legal and financial concerns, that may impact the state of the company and its future investors.

Importantly, trade compliance is an area that can pose significant risks to a company that does not have adequate internal controls or policies. On the export side, companies that sell and ship goods to foreign buyers may be subject to the Export Administration Regulations (“EAR”) or the International Traffic in Arms Regulations (“ITAR”). A violation of these regulations can result in an enforcement action by a regulatory agency like the Bureau of Industry and Security (“BIS”), the Directorate of Defense Trade Controls (“DDTC”), or even the Department of Justice (“DOJ”). In addition, the Office of Foreign Assets Control (“OFAC”) implements economic sanctions that control certain activities related to doing business in specified areas of concern or sanctioned parties. Depending on the nature of a violation, a company that violates these regulations can be subject to significant penalties, mandatory monitoring requirements, reputational harm, and scrutiny by oftentimes multiple government agencies. Therefore, companies that plan to go public should ensure that they review their internal compliance measures and identify risks associated with U.S. export controls and economic sanctions. Common types of risks associated with these areas include the following:

  • Classification: When exporting products to foreign countries, companies must ensure that they are classifying their products correctly under the EAR or ITAR. Many dual-use items are controlled pursuant to the Commerce Control List (“CCL”), while the United States Munitions List (“USML”) contains more restrictive controls for defense items. An incorrect classification can mean that a controlled item is exported without the proper approval from BIS or DDTC. Companies engaged in export activities should review their internal procedures for product classification and identify any discrepancies, errors, or compliance risks associated with this process.

  • Licensing: Licensing is another area where compliance issues frequently arise. As mentioned above, certain exports require prior approval by BIS or DDTC via the issuance of a license. Companies that must obtain licenses for certain exports should ensure that they are maintaining proper records of these transactions and that internal controls are in place to prevent inadvertent unlicensed exports. In addition, companies within the U.S. often must obtain licenses for the release of technology or technical data to foreign person employees working at the company even when these employees are located within the United States. Thus, it is important for companies to not only identify whether they have potentially controlled products or data, but to also identify whether licenses may need to be obtained for deemed exports to foreign person employees that may come into contact with these controlled items.

  • Customer Screening: Companies that export should be aware of BIS’s Unverified and Entity Lists that restrict exports to listed parties. In addition, OFAC administers lists of parties subject to economic sanctions. Companies that engage in business outside of the U.S. should have internal procedures in place for screening potential customers to identify whether they are a denied party or subject to economic sanctions. BIS or OFAC may grant licenses for companies to conduct certain activities with listed parties or to proscribed countries. However, the unlicensed export to a denied party or business transaction with a sanctioned party or country can lead to significant penalties and scrutiny by the regulatory agencies.

In addition to these compliance concerns related to exporting and doing business with foreign parties, U.S. companies that engage in importing activities should also be aware that violations of U.S. Customs regulations can result in similar types of enforcement actions by U.S. Customs and Border Protection (“CBP”). Companies that import goods into the U.S. should ensure that they have adequate internal compliance mechanisms related to the classification of goods under the Harmonized Tariff Schedule (“HTS”), valuation of imported merchandise, and record-keeping requirements under Customs regulations. Importantly, companies that engage in import activities often utilize external service providers such as brokers, accountants, or consultants to assist with the importing process. However, the use of external assistance does not alleviate an importer’s responsibility to comply with U.S. Customs regulations. As such, these companies should review whether they have policies or procedures in place to ensure effective coordination between these external parties and quickly identify issues or compliance concerns when they arise.

The above-mentioned compliance concerns are just some of the areas where companies engaged in international trade can be prone to errors. These errors can have negative impacts on the business activities of a company, its reputation, and its financial state. As such, companies preparing to undertake an IPO should take the time to review internal procedures related to trade compliance to ensure that they are identifying any risk factors that could affect the viability of the company and the state of its investors. These types of risks should be taken into consideration when identifying risk factors that may need to be reported pursuant to SEC requirements.

Other Practical Considerations

Companies that are preparing to undertake an IPO should also consider how going public may lead to required updates to a company’s existing licenses and accounts used to report import and export information. Specifically, under the EAR, a replacement export license is generally required to be filed when there is a “material” change to the license, including a change of ownership of the license holder.2 In addition, ITAR-registered companies are required to submit timely updates to their registration information if the company undergoes certain changes, including a change in ownership or control.3 While these updates typically are not required until after a change in ownership, a company that plans to undertake an IPO should be prepared to submit the proper updates to BIS and DDTC in a timely manner once the IPO takes place. These updates may require coordination between compliance personnel and legal, accounting, or other persons within the company familiar with the timeline of the IPO. As such, taking time to understand how an IPO will impact the company’s reporting requirements under the EAR and ITAR and generating a reporting plan will be an important step for the company in ensuring ongoing trade compliance.

Additionally, companies preparing to undertake an IPO can often undergo efforts to restructure or consolidate prior to the IPO taking place. These efforts may include merging entities, centralizing company activities, or even acquiring new divisions or subsidiaries. These changes may impact how a company chooses to manage its accounts related to export and import filings and reporting. While a company may undertake its own efforts to restructure, registration and accounts for export licenses, Electronic Export Information (“EEI”) reporting, and import documentation do not update automatically along with the company. Thus, compliance personnel within the company should consider whether updates to a company’s Automated Commercial Environment (“ACE”) accounts, Snap-R accounts, and/or Defense Export Control and Compliance System (“DECCS”) accounts may be warranted depending on the nature of the structural or ownership changes that take place.


Preparing for an IPO is a time-consuming and intensive process involving many aspects of due diligence. However, companies preparing for an IPO should keep in mind the role that trade compliance may play in due diligence efforts. Investing time into conducting trade due diligence in preparation of an IPO can help a company identify potential risk factors and prevent compliance issues from interfering with the company’s IPO process. If you have questions about trade due diligence or require assistance with understanding trade-related risks please feel free to contact the attorneys at Torres Trade Law, PLLC.

1 See Going Public, U.S. Securities & Exchange Comm., available at (last modified Apr. 23, 2023).

2 15 C.F.R. § 750.7.

3 22 C.F.R. § 122.4.

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