In order for a company to publicly trade its securities, it first needs to undergo an Initial Public Offering, also known as an IPO. An IPO is the process of offering the shares of a private company to the public for the first time.
Companies that offer an IPO do so to raise their capital, increase the company’s stock liquidity, and reduce debt. Shares can be bought by both institutional and individual investors. IPOs present a very exciting opportunity and attract potential investors because they provide them the chance to acquire shares as cheaply as possible with the hope that they will one day be worth considerably more.
With IPOs providing a unique opportunity to the public, it is important to know the steps a company must undergo before it can have an IPO since it is a very labor-intensive and long process.
Step 1: Finding Advisors
Before a company can even begin the process of going public, the first step the company needs to accomplish is finding a group of trusted advisors. These advisors include experts from a variety of fields to help the company with every issue that may arise. These advisors would include investment bankers, transfer agents, legal counsel, accountants, financial advisors, a public relations team, a securities attorney, a transfer agent, and an EDGAR filing provider.
Investment bankers are beneficial because they ultimately determine the timing of the company’s IPO, structure, and valuation. The responsibilities of the investment bankers include:
- Setting the timeline for the company’s public launch
- Advising on how many shares the company puts up for sale
- Recommending what price the shares will be listed at
- Determine what stock exchange it will be placed on
The team of investment bankers makes money by buying the company’s shares at a discount and then selling them back to the public at the IPO price. In addition to these responsibilities, investment bankers help in the underwriting process. Underwriters are another division within the investment bank. Their job is to manage the distribution of shares and their allocation. Investment bankers also help create demand for the company’s IPO which is vital for its success.
The second part of the advising team is legal counsel. The legal counsel is filled with lawyers who specialize in securities law and IPOs. Their main role is to provide assistance and legal advice throughout the entire process as well as prepare any necessary legal documents including the registration statement. Having legal counsel as part of the advising team makes sure that companies abide by all legal requirements and regulations imposed by the SEC.
Accountants are important because they make sure that the company’s financials are in order before the IPO is released. It is crucial that the company’s finances are accurate upon SEC review in order for the IPO to be approved and for potential investors to know all the information required about the company.
Financial advisors are not a part of the advising team for every company seeking an IPO, but they are often very popular and included. These financial advisors provide their knowledge and guidance about the company’s level of readiness for an IPO as well as give guidance about strategy and possible improvement to increase the company’s value before it turns public.
A public relations team takes the role of building public interest and creating demand further than the investment bankers. The team is in charge of managing and directing communication between the media, potential investors, and current stakeholders.
A securities attorney’s main duty is to have extensive knowledge about the current SEC regulations in place and use it to analyze the company’s filings and registration. The experts also respond to all SEC comments about the IPO registration form and clear up any inquiries that may halt the process.
A transfer agent is completely responsible in issuing securities to the initial participants of the company before the securities are available publicly. This includes:
- Early investors
- Founders
- Employees
- Advisors
The agent keeps up-to-date records about what portion of the company each individual involved owns as well as preps and regulates the issuing of shares for the upcoming offering.
The final part of the advising team is the EDGAR Filing Providers. The provider’s main role is to convert documents into technical formats and submit and file the Registration Statement and Preliminary Prospectus. Once the filings are completed, a company uses the prover to submit it to the SEC. In addition to filing, a Filing Provider can also assist with formatting and managing deadlines.
Finding the right team of experienced advisors who understand the IPO process and the company’s long-term goals is vital to the offering’s success.
Step 2: Analyzing the Financial Statements
The next step in the IPO process is when a company’s accountants go through its past financial and non-financial information meticulously to ensure it is accurate and complete. This is often a very brief step, but yet it needs to be done before a company can prepare and submit its Form S-1, which is the IPO Registration Statement, to improve its chances of approval. Overall, these accountants make sure that the company has released all potential risks and important information to the public and the SEC to make sure that people can make informed decisions.
Step 3: Preparing the Registration Statement Form S-1
The Registration Statement for an IPO, also known as Form S-1, is single-handedly the most important document that a company seeking to go public needs to complete. Form S-1 requires a company to go in depth in order to provide information about the following:
- The planned use of its capital in the future
- Current business model
- Current market competitors
- A brief plan of the potential listed security
- Offering price methodology
- Any possible dilution that may occur to other publicly traded companies’ stock.
Ultimately, preparing the registration form and explaining the potential side effects of your company being listed publicly on a stock exchange in advance is very important to increase a company’s chances of quicker SEC approval.
Step 4: Filing the Registration Statement with the SEC Under Applicable Securities Laws
After the company, with the help of its entire advising team, has prepared and completed the IPO Registration Statement, it releases its first draft, known as the Preliminary Prospectus or Red Herring, to its potential investors and files it with the SEC, through the Form S-1 filing. The Preliminary Prospectus contains information about the company, its financials, and the potential risks and benefits of investing in it. Overall, it is a summary of the information included in the Registration Statement. Once the first draft has been released, the official Registration Statement is then submitted to the SEC using EDGAR. Each time the company files an amended Form S-1, it cannot progress in the IPO process until the SEC responds through SEC comments.
Step 5: Waiting Period
The waiting period is often the longest part of the entire IPO process. On average, the SEC takes around 24-30 days to provide feedback, make comments, and ask questions to the company about its IPO Registration Statement. This process can take several rounds of revisions and comments before the SEC can approve the company’s IPO and declare its Registration Statement “effective”. Once a company’s Form S-1 has been deemed “effective”, the company can move on with the IPO process.
Step 6: Marketing the IPO
Before the company goes public officially, before the SEC effective date, interest surrounding the company and the IPO needs to be created in order to increase its likelihood of success. Marketing the IPO is mainly the responsibility of the public relations and investment banking team and it entails meeting with large and institutional potential investors. Their job is to sway them into purchasing a large share of the company’s stock when it goes public, which will increase the demand and price per share. Oftentimes when marketing an IPO these meetings will include in-depth presentations and discussions to ease any concerns and attract more interest.
Step 7: Pricing and Allocation
After the interest has been created surrounding the IPO, the company and advising team, specifically the investment bankers, come together to discuss the number of shares the company will release during its IPO and what the individual price of each share will be. Based on the level of interest the projected IPO has collected throughout the meetings, the investment bankers will recommend a price and share count. A higher price with a high share price typically means that interest during the meeting was extremely high and the company’s launch public most likely will be a success. Ultimately, the investment bankers can only provide recommendations regarding the price and share count, but it is the company’s final say. When a final decision is made, the information is then shared with the media for all potential investors to see.
Step 8: Public Trading Begins
When the company’s securities begin to be bought and sold, that typically marks the end of the IPO process. The company still must continue to follow reporting and disclosure requirements enforced by the SEC, but all necessary filings to be listed on a stock exchange have concluded.