The Basics
The term “IPO” has historically referred to the process associated with the first time a company offers its shares of capital stock to the general public through an underwriter or syndicate of underwriters. The benefits of an IPO may include raising new capital for the company, creating a trading market for shares of the company’s stock that will provide liquidity to its owners, the ability to use publicly traded stock as acquisition currency in M&A transactions and the chance to offer equity incentives to employees more broadly. As part of the IPO process, the company will be expected to assemble all of the underlying financial, operational, legal and management information necessary for submission to the Securities and Exchange Commission.
Perhaps the most-understood type of IPO involves a growth-oriented company that seeks market access in order to fund future business expansion. However, IPOs are also sometimes used by more mature firms, whose capital needs may not be as intensive, to provide liquidity to shareholders who may sell stock in the offering.
The general public has two main options to make such an investment: one, through an offer from the IPO’s underwriter to directly purchase shares at the offering price; or two, by purchasing shares through a stockbroker when the shares are subsequently resold in the public market after the IPO. As the SEC notes, IPOs are by their nature a potentially risky and speculative investment.
IPO vs. SPAC
As described by The Wall Street Journal, the special purpose acquisition company is a publicly traded company that holds only cash and no other assets. Often referred to as a blank-check company, the SPAC uses the cash raised in its own IPO to merge with a private company in what’s commonly referred to as a “de-SPAC” transaction. That private company will become a publicly traded company after the merger. A particular benefit of a private company going public through a de-SPAC transaction is that it allows the valuation of the merger target to occur in a discreet process with only a few participants.
The Regulatory Process
The IPO process begins the company’s involvement in a broad-based regulatory environment involving significant scrutiny. Specifically, with respect to the IPO, federal securities laws require a company to register with the SEC before it may offer or sell shares to the public. The company must file a “registration statement” with the SEC that includes a “prospectus” designed to provide background information about the company for purposes of investment diligence. The company cannot proceed to implement its IPO until the SEC staff has reviewed and issued an order declaring the effectiveness of the statement.
Staffing
The IPO process often involves 12 to 24 months of development from start to implementation. The process also calls upon the company to assume the cultural attributes of a public company over that time, including a sophisticated financial and operational foundation, implementation of robust governance practices and highly competent, committed internal management and external advisors.
Your Internal Team
The IPO process will place substantial performance and cultural pressures on the internal management team, which senior leadership and the board will need to recognize and monitor. Financial, accounting and legal executives in particular may be called upon to address unique IPO/public company process and disclosure matters while retaining responsibility for their day-to-day management duties. The internal management team will also need to be capable of directing operations once the enterprise becomes a public company and starts communicating effectively with investors, analysts and other stakeholders.
Your External Team
The IPO process may benefit from a broad array of third-party advisors whose respective contributions will likely be critical to the company’s ability to move the IPO process forward. That team will include law firms and accounting firms experienced in the IPO process and working with regulators such as the SEC, investment banking firms with industry-specific experience who will be responsible for marketing the company to prospective investors, executive compensation advisors and public relations and communications consultants who are experienced in working with SEC counsel in the IPO process and can ensure the effectiveness of public communications.
Your Board
The IPO process will also test the quality, composition and engagement of the governing board and its processes. Not only must the board exercise oversight of management’s preparation for the IPO, it must also prepare to adopt the steps necessary to satisfy the laws, regulations and best practices that apply to public companies. The SEC and the leading stock exchanges have specific expectations regarding the formation and composition of public company boards, especially with respect to such matters as oversight, independence and the structure of key committees such as audit, governance and compensation committees.
Financial Reporting And Accounting Matters
Company leaders will need to embrace financial transparency and financial statement integrity, which are integral to the registration and disclosure process. The general practice is to make available three years of audited financial statements as well as three years of other selected financial data. Leadership should also work closely with company auditors to confirm the strength of internal financial controls and to identify any issues that might attract scrutiny by the SEC in its review process.