The Road to IPOJanuary 6, 2022 10:51 am
The decision to go public marks an important milestone in the lifespan of any business. An IPO, or initial public offering, allows a private corporation to offer shares of itself to the public for the first time. While often executed in order to obtain necessary capital, an IPO also enables founders and early investors to profit from the company’s move to the public market.
With so many benefits, an IPO can be a tantalizing opportunity for any expanding private corporation. But how do you know if your company is prepared to go public?
In this guide, we’ll discuss IPO readiness, break down the traditional IPO process, and shed light on the requirements set by exchanges and the Securities and Exchange Commission (SEC).
What Does it Mean to Be IPO Ready?
Despite the many benefits of going public, it’s always important to assess whether your company is up to the task.
A private company is typically considered IPO ready if it has reached a stage in its growth process where it can withstand the pressures of SEC requirements and the needs of public shareholders. While not set in stone, this stage normally coincides with a private valuation of at least $1 billion dollars, otherwise known as unicorn status.
If you think your company might be ready for an IPO, it is crucial to consider the following four determining factors:
#1 Your Team
Do you have the right people running the ship? Does your senior management team and board of directors understand the risks and rewards associated with going public? These can be difficult questions to tackle alone, which is why selecting one or more experienced advisors early on can be an absolute lifesaver in the IPO process. These advisors are typically auditors or attorneys whose established connections with the SEC and investment bankers will prove invaluable to you and your business.
Once you’ve gotten your leadership in order with the help of a trusted advisor, you’ll need to find an underwriter—usually an investment bank—that will guide you on the road to a successful IPO.
#2 Your Finances
SEC requirements calls for at least two years of audited financial reports from any corporation seeking IPO market status, but most choose to include up to three years of audited financial statements when they file.
While preparing for a successful IPO, it’s crucial that you employ the services of an independent auditor, meaning a firm that has not performed tax or other services for your firm in the past.
The SEC will use these audited financial statements to determine whether your corporation qualifies as an emerging growth company (EGC)
- This special status is preserved for companies with annual gross revenues under $1.07 billion that have not “sold common equity securities under a registration statement.”
- Obtaining EGC status can greatly reduce the regulatory burdens of an IPO.
#3 Your Communications Plan
Going public means exposing your private company to the pressures of constant attention. Coming up with a pre IPO communication plan will help ensure that the rest of the process goes smoothly.
Before launching your IPO, it is crucial to understand the SEC’s regulations on public communications, and then apply these rules to your company’s online presence.
By reviewing your website, cleaning up your social media, and doing whatever possible to maintain a good reputation online, you will not only avoid unnecessary confrontation with the SEC but also attract more investors in the process.
#4 Your Insurance
By filing for an IPO, you naturally expose your business and its management team to much higher risks than before. You now have responsibilities to:
Update your insurance to provide the requisite coverage. A good directors & officers (D&O) liability policy will help insulate your company’s leadership from personal losses stemming from any IPO-related lawsuits.
While certainly not exhaustive, these four factors are universal when it comes to determining IPO readiness. Once you’ve determined their significance for your business, you can begin the process of filing for an IPO.
What Is the IPO Process?
When going public, you seize an opportunity to grow your company while simultaneously exposing it to increased regulation, heightened scrutiny, and more shareholder accountability than ever before. In order to reap the benefits of an IPO, it’s important to follow a well-developed plan of action—a series of goalposts designed to keep your business on track and compliant.
Ranging from anywhere between six months to a year, the IPO planning process can be daunting for even the most qualified corporation. Fortunately, you don’t have to go it alone. These five steps form the backbone of the IPO process, enabling you to make the most of your transition from privately to publicly owned.
Step 1: Choose Your Underwriter
An IPO underwriter, also known as an equity underwriter, is typically an investment bank with a dedicated staff of IPO specialists. As you embark on your journey, you will need to consider the unique proposals of a number of underwriters before settling on the representative who best fits your company’s needs.
The proposal or letter of intent will likely describe the underwriter’s services, a suggested offering price, a number of shares, and a time frame for bringing your IPO to the capital market.
Once you’ve chosen an underwriter, they will complete an underwriting agreement, after which they will be contractually required to purchase the stock issuance from your company at a predetermined price.
With the initial steps out of the way, your underwriter will be able to make sure your company follows the regulatory requirements determined by the SEC and any relevant exchanges, as well as offer the full disposal of their distribution network to sell your stock to investors.
Step 2: Form Your IPO Team
With your underwriter in place, you’ll need to secure a number of other experts whose guidance will keep the process running as smoothly as possible.
This will likely include specialized attorneys, certified public accountants (CPAs), and a number of other experts on SEC rules and regulations. These figures will work in tandem with your underwriter to help you and your management team transition from private to public with as few missteps as possible. With so many moving parts involved in the IPO process, it’s absolutely essential that you have the right people in place from start to finish.
Most importantly, they will oversee the process of preparing your S-1 Registration Statement, a two-part document required from any company seeking IPO market approval from the SEC.
Step 3: Finalize and Submit Your Registration Statement
The S-1 Registration Statement, commonly known as the SEC Form S-1, consists of a prospectus and an optional document describing private filing information such as the sale of unregistered securities. The SEC Form S-1 is required for any company looking to sell shares of securities such as stocks or bonds on a public exchange like the NYSE or Nasdaq.
The prospectus portion typically includes the following company information:
- Plan for capital proceeds generated by IPO
- Business model
- Price per share
- Description of company management
- Financial status
- Percentage of business to be sold by private holders
- Information about underwriter
Begun toward the start of the IPO process, the SEC Form S-1 is invariably revised over a series of months to ensure the eventual filing is as airtight as possible. Once it has been submitted, the SEC will review your prospectus and any other submitted information in tandem with your company’s audited financial reports to determine whether to accept your IPO filing.
Step 4: Get Your Marketing in Order
As much as you might believe in the worth of your company’s shares, you’ll need a finely tuned marketing strategy to drum up the interest of prospective shareholders.
- A good marketing strategy will help underwriters and management to determine interest and set a share price designed to attract new investors.
- Your strategy should also simultaneously protect and grow the investments of the founders and private investors who helped you go public to begin with.
- Marketing toward an IPO should be designed in tandem with your already-existing brand image while fulfilling the need to reach as many new investors as possible.
Generating interest is a great way to gauge share value, but it needs to be done carefully. That means following the SEC’s guidelines on corporate communications as well as the guidelines of the relevant exchange.
Step 5: Issue Shares
Once the SEC has approved your filing, you will reach the goal line known as your IPO date. After months of waiting, your private company will finally go public by issuing shares through the exchange you’ve selected to best suit your needs.
This influx of capital will be followed by a period known as stabilization, wherein your underwriter will purchase shares either at or below the offering price to ensure a smooth transition to public market competition. This step, which begins 25 days after the IPO date, enables investors to look past the prospectus and determine the value of their shares based on external market forces.
Share Your Journey with Issuer Direct
The road to IPO is an exciting journey for a company and its shareholders. The media attention surrounding a decision to go public alongside the influx of capital from your IPO can be intoxicating, to say the very least.
At Issuer Direct, we have a proven history of helping corporations communicate their achievements throughout their respective industries. While it’s important to focus on the future, it can help to look to the past as well. Remain true to your company’s roots while staying in the present as much as possible. In this way, you’ll be able to recognize your IPO as the achievement it is while resisting the temptation to rest on your laurels.
With our investor relations resources, you’ll maintain the trust of shareholders, employees, and clients while reaching new audiences worldwide.
Corporate Finance Institute. IPO Process.
U.S. Securities and Exchange Commission. Emerging Growth Companies.
U.S. Securities and Exchange Commission. Quiet Period.