Initial Public Offering (IPO) Process

Most startup entrepreneurs dream of a successful IPO. Once you’ve built up your company and it comes time to start thinking about the IPO process, make sure to consider the practical matters listed on this page. After all, a successful IPO can set your company up for great success in the years to come, while a bungled IPO can set you back significantly. Properly preparing for the IPO process is vital to the success of an IPO.

An important part of any successful IPO is who is on your IPO team--including your IPO lawyers. When you use Priori to find your IPO lawyers, you can be sure that you will be put in touch with highly qualified, pre-vetted candidates so you can choose the lawyer who best fits with your team.

Is your company ready for the IPO process?

 Undertaking an IPO is time-consuming, challenging, and expensive. There are several factors to consider before beginning preparations for an IPO.

Advantages of IPO 

Some of the biggest advantages of IPO include:

  • increased long-term capital;
  • better access to cash and improved liquidity;
  • increased market value;
  • improved growth opportunities;
  • better ability to attract and keep key personnel;
  • increased prestige; and
  • greater opportunities for mergers and acquisitions through equity.

Disadvantages of IPO

Some of the biggest disadvantages of IPO include: 

  • increased operating expenses;
  • the potential to lose control of the company;
  • expanded disclosure and compliance requirements;
  • increased pressure for measurable results;
  • the need to manage investor expectations;
  • increased litigation risk; and
  • higher vulnerability to hostile takeovers.

Steps to a Successful IPO

If you decide that it is the right time for your company to begin the IPO process, there are certain steps that you must follow in order to have a successful IPO:

1.      Hire the right team.

Your senior management team should be prepared to handle all the additional pressures brought about by the IPO process. In particular, you need to ensure that your team has someone in place with considerable financial and accounting experience in complying with the demands of a public company, as well as team members with excellent communication skills. Your board of directors often has to be adjusted at this point in order to ensure that they are independent and that you have at least one financial expert on the audit committee. Finally, you want to hire IPO lawyers that you trust and who have experience with the IPO process, as they will be key in drafting the necessary paperwork and disclosures and navigating the IPO process.

2.      Update financial reporting procedures and systems.

To ensure a flow of accurate, timely financial information through disclosures in a way that complies with the Sarbanes-Oxley Act, you must ensure that your company has proper financial reporting systems in place. It is also important to reassess your tax requirements and overhaul any financial procedures that are not transparent or are inefficient.

3.      Choose investment banking partners.

The investment bank you work with will help prepare your company for the IPO and will make sure the market launch goes well. Accordingly, selecting the right investment banking partner for the IPO process is crucial.

4.      Draft the IPO prospectus.

You and your IPO lawyers must draft all principal offering documents, including the IPO prospectus, which must be filed with the SEC as part of the IPO registration statement. The IPO prospectus tells the story of your company, highlighting its strengths, strategy, market share, products, financials, and overall investment opportunities. The prospectus also discloses the key risks involved with investing in your company, as well as any mitigating factors. Because the IPO prospectus is subject to extensive disclosure requirements, you and your IPO lawyers must collaborate and approach this task with great care during the IPO process.

5.      File a registration statement with the SEC and begin the review process.

Your IPO lawyers must file your IPO prospectus and your entire registration statement with the SEC, subject to review and comment by the SEC during a 30-day review process. Once this process is complete, your company will complete an initial listing application with the exchange. Underwriters will then file information about compensation arrangements for your IPO with the Financial Industry Regulatory Authority (FINRA).

6.      Start the “road show.”

The term "road show" refers to the several-week period during which you present potential investors with a preliminary IPO prospectus setting forth your company's anticipated offering size and the price range for its shares (sometimes called “reds” or “red herrings”). These presentations are meant to build interest in your IPO and raise the profile of your company in investment circles.

7.      Price your shares.

Based on interest during the roadshow and a range of other market- and company-driven factors, the underwriters will set a price at which the company and any selling stockholders agree to sell shares to the underwriters at closing.

8.      Complete your offering.

Typically, four business days after pricing, the IPO will close, and the issuer and any selling stockholders will release their shares to the underwriters. This officially makes the company public and completes the IPO process.

Priori Pricing

Preparing for an IPO is a costly endeavor, the total cost of which can vary significantly depending on your legal needs. Priori IPO lawyers can guide you through the IPO process at rates ranging from approximately $185 per hour to $450 per hour. Priori clients also enjoy a net-15% discount on standard hourly rates. In order to get a better sense of cost for your particular IPO situation, put in a request to schedule a complimentary consultation and free price quote from one of our IPO lawyers.

FAQ

When should my company begin thinking about the IPO process?

Many startups wonder when to begin the IPO process, but unfortunately, there is no clear-cut answer to this question. If market conditions are right, your company is experiencing high levels of growth, the leadership team is prepared, your financials are in order, and capital demands have exceeded your ability to raise capital from other attractive sources, it may be the right time for an IPO. If you are wondering whether your company is ready for an IPO, you should discuss the logistics with an IPO lawyer, your leadership team, and trusted advisors.

How do existing investors and other shareholders play into the IPO process?

During the IPO process, you will need to consider company insiders like investors and employees who already own shares in the company. Particularly with regards to investors, your investment documents may include registration rights or a lockup period that govern how investor shares will factor into your plan for an IPO. 

Registration rights provide investors with assurance that their preferred shares, which later convert into common stock, are able to be sold on the general market. There are two main categories of registration rights--demand rights and piggyback rights. Demand rights permit investors to require the company to register their shares with the SEC so that they can be sold on the general market. Piggyback rights, on the other hand, are more directly related to a company's decision to pursue an IPO. Piggyback rights permit investors to require the company to allow investors to participate in a public offering by the company. However, these rights do not permit investors to require a company to register its shares; they only require a company to include investors' shares in a public offering initiated by the company. Sometimes, piggyback rights are subject to limitations. For example, the company may limit the amount of shares investors may register for sale if there will be negative implications on the IPO.

A lockup period, in contrast, requires an investor to wait a certain amount of time before selling or trading their shares after an IPO. Typically, a lockup period lasts between 90 and 180 days, and it prevents those who are holding company stock before an IPO from selling their shares for that period of time after the IPO. This provision helps prevent shares from flooding into the market after an IPO, which would decrease the company's stock price. These provisions also help prevent scaring off potential buyers of company securities; if many insiders sell off their shares immediately after an IPO, potential buyers may worry about insiders' faith in the company.

 

 

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