“Going public” offers private companies powerful growth opportunities — but also comes with a host of responsibilities to meet including scrutiny by government regulators, analysts and investors. Going public is an extremely taxing event for a company and the professionals engaged, who are under pressure to get it done on time. Companies need to nail every detail to maximize their return as they prepare to go public.
Despite the complexity and uniqueness of every IPO, a study of some of the companies that successfully reach their IPO milestone reveals a common set of steps and best practices in their preparation:
1) Careful Selection and Assembly of the Working Group
The countless requirements and finer details of going public demand a broad range of highly specialized expertise. The first step in preparing for a public offering is to build your team of expert partners who bring deep experience and proven results helping companies go public. This working group typically includes four key partners:
Investment Bank: The investment bank is the intermediary between the company and the investors and acts as the bookrunner managing the order book for the company’s securities once the IPO is placed into the market. The investment bank will help the company through all phases of the IPO process, including assessing the value of the company, conducting due diligence, advising on the structure, size and valuation of the offering, marketing and managing the sale of the securities in the lead-up to the initial offering and issuance of shares in the post-offering phase. The importance of the selection of the investment bank/underwriter cannot be understated. You should consider their reputation and experience, understanding of your business category, enthusiasm and alignment with company leadership vision and quality of the team. This critical partner will ultimately be responsible for selling the IPO.
Law Firm: From the outset, the selected counsel assists in negotiating the underwriting agreement with the investment bank. Given the many detailed laws and complex rules governing SEC filings and required disclosures in registration statements, the law firm helps navigate this web of requirements — at both the federal and state level. They provide crucial guidance on how best to complete the IPO while mitigating liability and avoiding infractions and penalties. The law firm acts as the contact point between the company’s Working Group and the SEC. Additionally, they assist the company’s officers and directors in complying with a myriad of legal responsibilities following the offering.
Auditor / Accounting Firm: Companies going public require supplementary support to assist in the transition to new accounting, reporting and disclosure standards, the training of internal accounting and finance staff as well as preparing for SOX compliance requirements. An experienced accounting firm can provide these services and act as the auditor to oversee the entire IPO process.
Financial Printer / SEC Filer: The S-1 filings have specific requirements and formatting standards that require professional support. With the continued push of EDGAR (Electronic Data Gathering, Analysis and Retrieval) and the overall shift toward digitalization of financial reporting and documentation, as a publicly-traded company, you’ll need the support of a financial printer/SEC filer who is experienced in digital production — including the SEC universally required iXBRL (Inline eXtensible Business Reporting Language) filing requirement to ensure compliance with post-IPO filing requirements as a newly public entity.
2) Conduct Due Diligence
The first significant step of the IPO preparation process is to conduct an in-depth audit. The investment bank, law firm and accounting firm (auditor) will be involved in this due diligence process. The output of this due diligence will be a complete narrative of the company’s operations including assets and liabilities, comprehensive financial, tax, legal and IP information, industry insights, market research and customer verification. The review should include information on all directors and officers of the company, corporate structure and governance. The goal of the investigation is to fully understand the financials to better set the value of the offering as well as gather the information necessary to provide potential investors full transparency into the operations of the company, understand potential risks associated with an investment and to assure all claims made in the company's registration statement are complete and accurate.
It's in these early stages of the offering process that the company should weigh the relative advantages and determine their preferred exchange (Nasdaq, NYSE or any other securities market).
|Are you eligible to file as an Emerging Growth Company?
The Jumpstart Our Business Startups Act (JOBS Act) of 2012 established a new class of filers called Emerging Growth Companies (EGC). The goal is to support the funding of small businesses allowing the business that fit EGC criteria to become public more quickly and easily with less regulation, including a confidential review of their draft registration statement by the SEC before filing publicly. Before proceeding with the IPO preparation process, you’ll want to determine if your company is eligible to file as an EGC, as it will impact the requirements and recommendations."
Best Practices for Due Diligence
Due diligence should be a comprehensive audit, but there are a few things the Working Group should pay special attention to, including:
- Financial statements: Per US-GAAP (Generally Accepted Accounting Principles), the following financials are required when submitting for an IPO:
- Balance Sheets: Audited, consolidated (if there are subsidiaries) balance sheets for the end of the two most recent years. If your company has been in existence for a year or less, then you must provide an audited balance sheet as of a date within 134 days of the filing of the public registration.
- Income Statements: Audited income statements for each of the three fiscal years preceding the date of the most recent audited balance sheet being filed. This could be shortened, depending on how long your company has existed.
- Cash Flow Statements: Audited cash flow statement for each of the three preceding fiscal years. This could be shortened, depending on how long your company has existed.
- Interim Reviewed Financial Statements: If the filing is over 134 days after the end of your fiscal year, then you’ll be required to submit Interim Reviewed Financials.
- Internal controls: Discuss deficiencies and material weaknesses in your current internal financial controls with your advisory partners. These issues may impact the SEC review process. The best practice is to prepare to disclose these issues to regulators and the public and proactively address these issues.
- Accounting issues: Likewise, the best practice is to examine, identify and begin remediating any problems in your current accounting practices as early in the IPO process as possible. Discuss any issues with your advisory partners to prioritize those most likely to raise red flags with regulators and the public.
- SOX compliance: As part of going public, the company must bring all internal controls into compliance with the Sarbanes-Oxley Act — and Section 404, in particular. An experienced advisor should be able to help you navigate any needed updates to achieve SOX compliance.
Virtual Data Room Software Transforming Due Diligence
Traditionally, due diligence is the most time-consuming, painful and error-prone part of the IPO process. But sophisticated virtual data rooms (VDRs) make it easier, faster and more secure than ever to manage and streamline the financial due diligence process. Data room software enables the secure and seamless sharing of critical documents. And best-in-class virtual data room software provides intelligent workflows to drive smart collaboration, ensuring thorough diligence and delivering more accurate insights — without the redundancies and time costs of conventionally manual, paper-based workflows.
|Direct Listing is also an IPO option
An alternative to the IPO process is a direct listing. Warby Parker, Spotify, Coinbase, Slack and ZipRecruiter are examples of recent, well-known direct listings. Both NYSE and Nasdaq allow for direct listings where in which the company sells shares directly to the public without issuing new shares or the support of an investment bank/underwriter. A direct listing must follow the same process namely filing a registration statement on Form S-1 and is subject to all reporting and governance requirements for publicly traded companies.
3) Drafting the Initial Public Offering Prospectus
Using the insights and information assembled through the due diligence process, the Working Group can begin preparing the initial documents that will eventually be synthesized into the IPO prospectus. The prospectus will include an abbreviated summary, risk factors, selected financial data, business overview of the company and its industry, its competitive strengths and business strategies, Management’s Discussion and Analysis of Financial Condition and Results of Operations (a narrative of the company’s business and results), management and executive compensation, financial statements, exhibits and the initial public offering itself with detailed information related to the use of proceeds, determination of offering price, legal proceedings and government regulation, underwriting arrangements and other matters related to the offering.
It's crucial at this time to identify an underwriter style and assign responsibility to prepare the list of exhibits required to be filed in the registration statement and collect the exhibits files.
Most companies often critically underestimate the amount of time and effort needed to prepare artwork, charts, graphs, and exhibits the prospectus and S-1 registration statement require. With complex filings and numerous editing and proofing cycles, the actual drafting is an unpredictable process — even for those who are well prepared.
Another element of the process where things often slow down and surprise companies is the EDGAR filing process. Executing an EDGAR filing — the electronic filing of the documentation for the IPO — requires significant time and attention. This process includes initial “EDGARization” of documents (converting Word, Excel, PDF documents into EDGAR ASCII or HTML formats), creation of the EDGAR submission, the transmission of EDGAR filing to SEC and finally the acceptance verification of successful filing. The amount of time required for each filing can vary and is dependent on key variables. Rely on your financial printer/SEC filer, who will facilitate the actual filing of the documents. Financial printer/SEC filers bring extensive experience with underwriter style and SEC formatting requirements, with leading partners having completed thousands of IPO submissions. This experience helps the company and the entire working group mitigate liabilities and risks that formatting and submission errors could present.
4) Submit Required Applications for Listings
Submit application and application fee to your selected stock exchange.
The New York Stock Exchange NYSE and Nasdaq both have secure online portals that allow for the electronic submission of payments and applications for listing.
Securities and Exchange Commission
Submit for both a Central Index Key and a CIK Confirmation Code and Fund Your Account
The Central Index Key (CIK) is a unique, public number assigned to each corporate entity that submits filings to the SEC. Use of the CIK allows the SEC to differentiate between filing entities with similar names.
The CIK Confirmation Code (CCC) is used in combination with the CIK to submit a filing via EDGAR. The code is case sensitive must contain eight characters having at least one number (0-9) and at least one special character ($ % ? !).
Make preparations for the electronic transfer of funds to pay the SEC Registration Fee. The Company’s CIK number must be included with the transfer of funds.
Quick tips for SEC fee transfers:
- Wire funds at least a day before filing.
- Provide your financial printer with the date, exact amount of transfer and Fed Wire Number.
- If a wire transfer of SEC filing fees does not contain the required information in the proper format, the SEC may not be able to identify the payor and the acceptance of the filing may be delayed. A Filing Fee FEDWIRE Payment template and complete instructions are available at http://www.sec.gov/info/edgar/fedwire.htm
5) Filing the IPO Registration Statement with the SEC
After the registration statement has been prepared and the exhibits assembled and the submission is perfectly formatted to SEC standards, the registration statement is filed with the SEC via the EDGAR system, an electronic system that makes filings available online to the public. The company must keep on file for five years a set of manually signed signature pages to the registration statement and any amendments that have been executed by the members of the board of directors, the principal executive officer, the principal financial officer and the principal accounting officer.
At the same time as the SEC filing, a copy of the registration statement and the underwriting agreement should be submitted to FINRA (a separate filing fee applies). FINRA (Financial Industry Regulatory Authority), a not-for-profit organization working under the supervision of the SEC, will review the proposed offering arrangements to determine whether the underwriters’ compensation for the offering is fair and equitable to the company and any selling stockholders. This FINRA review must be completed before the SEC will declare the registration statement effective.
Additional related filings: Federal securities laws require specific individuals (such as officers, directors, and those that hold more than 10% of any class of a company’s securities, commonly referred to as “insiders”) to report when a person becomes an insider and executes a transaction (purchases or sells holdings of their company’s securities) by filing SEC Forms 3, 4 and 5. Each "insider" must file a form.
General Best Practices
To avoid issues that slow down or stop the progress of the IPO, here are a few best practices:
- Send the exhibit files to your financial printer/SEC filer early and often. Although Inline XBRL (iXBRL) is not required for the Draft Registration Statement / S-1 filing, you’ll need to begin preparing for post-IPO regulatory disclosure reporting, including the creation and submission of EDGAR and iXBRL instance documents.
- Identify a “point person” in the working group to coordinate all activities with the financial printer/SEC filer who will handle XBRL tagging and EDGAR filing. This is typically a lead investment banker who is responsible for supplying print quantities, print distribution instructions and labels for syndicate and prospective investor meetings and mailings.
- Submit artwork and PMS colors of the company logo and any other artwork. Acceptable file formats include EPS, TIFF, or JPEG.
- Circulate signature pages in advance for signing to avoid last-minute scrambles for officers’, directors’, legal counsel’s and accountant’s signatures.
- Seek supplementary support from your financial printer/filer who has experience in assisting in the transition to new accounting, reporting and disclosure standards, training internal accounting and finance staff, and preparing for SOX compliance requirements.
6) Respond to SEC Comments
Once filed, there is a 30-day review process when the filing is subject to review and comment by the SEC. If the SEC has clarifying questions or concerns, the company must respond to those issues.
7) Preparing IPO Marketing MaterialsBefore the public IPO, in partnership with the investment bank, you’ll conduct a “roadshow” to market the company’s IPO to large private investors. To prepare for the roadshow, the company typically builds marketing materials that tell a compelling story around:
- Company history
- Mission-driven vision and growth goals
- Company financials
- IPO goals
In building the roadshow portfolio, it’s essential to consider both an online and offline presence. Online presentations exploded at the start of the global pandemic and remain a popular option for pre-sell presentations.
8) Conduct the IPO Roadshow
The roadshow brings the sales pitch for the company’s IPO to potential investors. Traditionally, companies have traveled to major cities and specific locations of targeted investors, holding both large events and small, personal meetings. Increasingly, roadshow presentations are held virtually. The company leadership and the underwriters (investment bank) are part of this sales pitch. The roadshow presentations unveil the size of the offering and the targeted price range for shares. The overall goal of the roadshow is obvious: Build buzz and excitement around the IPO, generate interest among potential investors, and ultimately drive up the initial sale price of shares.
*Note: a general rule of thumb is you must file publicly at least 15 days before your roadshow.
9) Complete Initial Listing Application and File with FINRA
Once the SEC is satisfied and the review process is complete, the SEC will declare the application “Effective” (fully approved). The company will complete an initial listing application with the exchange. Underwriters will then file compensation information for the IPO with the Financial Industry Regulatory Authority (FINRA) and complete an initial listing application with the selected exchange.
10) Setting Share Prices
In the lead-up to the company being officially listed and available on an exchange, the company and the working group — having assessed investor interest during the roadshow — will monitor market conditions to determine the final date and the initial sale price for shares with an eye towards maximizing the opportunity.
Best practice holds that underpricing an IPO can help ensure that the issue is fully subscribed/ oversubscribed by the public investors — in other words, investors buy up all available shares in the IPO. By increasing demand for shares, the company hopes to drive a rise in the price of shares on that initial day and in subsequent days. Underpricing the initial offering also helps to mitigate risk for those initial investors. For reference, an IPO that is oversubscribed by 200-300% (that is, there are 2-3 times more interested investors than shares) is typically considered a successful IPO.
11) Allocate Shares and Initiate Trading
A few days after pricing is set, the IPO will close, and the issuer and any selling stockholders must release their shares to the underwriters. Once all shares are released, the institutional investors who have already purchased shares will get their allocations and public trading will begin.
Operating & Succeeding as a Public Company
The IPO process can be lengthy and arduous, with many potential impediments. But reaching the IPO milestone and the subsequent allocation of shares is not the finish line — rather, it’s the start of an entirely new journey. Operating as a public company entails its own broad set of complex requirements and best practices that often differ greatly from those governing private companies. If your IPO process has been a smooth success, it’s wise to retain your engagement with your working group partners. These investment banking, legal and financial reporting experts can continue to provide expert counsel and services to help you plan and navigate the demands and challenges of operating as a public company.