If you have decided a public offering is the best financing solution for your company, you should realize that the IPO’s success depends on careful planning and the assistance of a team of qualified professionals. The IPO planning process should begin two to three years before the anticipated date of completing the offering. This lead time is important if you wish to keep IPO costs to a minimum, avoid surprises, adequately prepare the company for the due diligence process and the public scrutiny associated with an IPO, and increase the chances of good market timing.
The first thing to do in anticipation of an IPO is to develop a business plan detailing your strategic, marketing and financing plans for the future. This plan should include financial projections showing the amount of financing needed and the uses to be made of the funds raised. To help you identify areas needing special attention before you contact potential underwriters, you also should review a due diligence checklist, an example of which is included in Exhibit A of this guide.
Once you have completed your business plan and due diligence checklist, the company is ready to select a managing underwriter. The underwriter purchases the securities from the company and sells them to the public through a syndicate. Management must demonstrate to the underwriter that the company is qualified to go public. Your business plan, the company’s financing needs, the attractiveness of your company to the market, and a projected shortage of “problems” in the due diligence process will be factors in generating underwriter interest in your company. The estimated sales price per share and the number of shares to be offered are then negotiated with the underwriter.
Once the underwriter is selected, the underwriter begins the due diligence process and the preparation of the registration statement, a disclosure document filed with the SEC that consists of two parts:
- The prospectus, which is distributed to potential purchasers of the securities
- The supplemental information section, which contains other detailed information and various exhibits, including copies of key legal contracts and documents
The due diligence process and the preparation of the registration statement are usually the most time-consuming activities in the IPO process.
As the owner or manager of a private company, you likely will be surprised, and possibly frustrated, by the substantial disclosure requirements of the registration statement. The most important aspects of going public are understanding what information is required of you and then presenting it in a clear and forthright manner. To better understand the process and the role of the key team members, you should know what information will be required. The average two to three months (or more) that it takes to prepare to file the registration statement is generally due to the extensive due diligence process, the registration statement development itself and the frequent and interrelated business decisions that often must be made and implemented as part of the IPO process.
Once the registration statement is in final draft form, it is filed with the SEC in electronic format using the SEC’s Electronic Data Gathering and Retrieval (EDGAR) system. You also may be required to file the registration statement with the various states in which the securities are to be offered. The SEC thoroughly reviews the document and responds (usually within 30 business days) with comments about disclosures and accounting matters that need enhancement, clarification or modification. The comment letter process might require several rounds of SEC comments and company responses, including revisions to the registration statement. The SEC will declare the registration statement effective only after the required changes have been made and when it is satisfied with the responses to the comments. If the initial document filed with the SEC is printed, the underwriter might distribute copies of this preliminary prospectus, also known as a “red herring,” to potential investors during the period that it is under review by the SEC. However, the underwriter frequently will print a preliminary prospectus only after receipt of the initial SEC comments and the filing of an amendment to address such comments.
Prior to its IPO, a company may confidentially submit to the SEC a draft registration statement for nonpublic review by the staff of the SEC prior to public filing. This confidential treatment option permits the company to resolve accounting or disclosure issues with the SEC privately and delays exposure of sensitive competitive information until the certainty of an offering is confirmed. The initial confidential submission and all amendments to the registration statements then must be filed publicly at least 15 days prior to the IPO road show or, in the absence of a road show, at least 15 days prior to the requested effective date of the registration statement.
Although the underwriter cannot take orders or deliver securities until the registration statement becomes effective, most of the underwriter’s selling effort takes place beginning with the original filing and concluding when the registration statement becomes effective. The managing underwriter usually forms a sales and distribution syndicate. This syndicate of underwriters uses its salespeople to distribute the preliminary prospectus to clients and to obtain indications of interest in the stock. Although these indications of interest are not legally binding, they enable underwriters to evaluate the likely success and price of the offering.
Once the SEC is satisfied with the registration statement, but before it is declared effective, you will complete negotiations with the underwriter regarding the selling price per share, and the number of shares to be offered. A final amendment to the registration statement, the “pricing amendment,” is filed when this negotiation is completed. Subsequently, the registration statement is declared effective by the SEC and the securities commissioners of the various states, and the final prospectus is printed and sent to the underwriters’ customers along with the confirmation of sale.
The prospectus might appear to be a contradictory document. On one hand, it is a selling document and is used to persuade the public to purchase shares. At the same time, it must adequately inform investors of the offering’s risk factors and disclose all relevant information to protect against potential liability for material misstatements or omissions of fact. Accordingly, the prospectus can be a somewhat unpersuasive document. Your team of professional advisors can help you walk this fine line between salesmanship and liability protection. Obviously, full disclosure must be your paramount concern.
The final step in the registration process is the closing. The closing is the date on which you give the underwriter the shares of stock and, in return, receive the net offering proceeds. The closing generally is held three business days after the effective date, giving underwriters time to receive most customers’ payments before the closing date.
