Let’s talk about going public onto the NYSE and Nasdaq markets. For many entrepreneurs, taking their company public is the ultimate dream and mark of success. Every company is considered to be private before going public with a smaller number of shareholders, and limited accredited investors. Companies going public have considerable benefits such as an increased access to capital-raising opportunities, expansion of investor base, liquidity for investors, value for securities can be established, and lower cost of capital relative to debt financing. In order to go public, the company must enroll in the Initial Public Offering (IPO) process where a formerly unlisted company sells new or existing securities and overtures to the public for the first time. Our list here features seven steps/requirements of what it takes to go through the IPO Process and altering your company to go public for the first time.
1. Hire a Team of Underwriters
The first step of the IPO Process is for the issuing company to choose an investment bank that will guide and advise the company on its IPO and the underwriting services. These banks are certified with the SEC (Securities and Exchange Committee) and perform as underwriters. As for IPO underwriters, these are the investment bankers who specialize their work alongside the company issuing the IPO, and further determine the initial offer price, purchase shares from the issuing company, and sell the shares to the investors. Before making a final decision on an investment bank or an underwriter, there are a few things to examine:
- Reputation
- Quality of research
- Industry expertise
- Network distribution (i.e, if an investment bank can administer the issued securities to more institutional investors)
- Companies prior relationship with the investment bank
- The underwriters previous relation with other companies
2. Due Diligence and Regulatory Filings
In this next step, due diligence is the most time-consuming part of the process. Since this step takes so long, it usually takes around 3 months prior to the IPO. The underwriter acts as a broker between the issuing company and the investing public to stimulate the issuing company to sell its primary set of shares. The underwriting arrangements are applicable to the issuing company:
- Firm Commitment, states the underwriter will purchase all shares from the issuing company, and will resell them to the public.
- Best Efforts Agreement, declares that the underwriter does not guarantee an amount of money but will sell the shares in favor of the issuing company.
- All or None Agreement, offering is canceled, unless all of the offered shares can be sold
- Syndicate of Underwriters, asserts that public offerings can be governed by one underwriter or by multiple managers.
The issuing company needs to register with the SEC, and numerous contracts need to be met with by the company and the underwriter. The pile of paperwork the company and underwriters need to fill out are as followed:
- Engagement Letter, two parts of the letter include: reimbursement clause (issuing company will cover the underwriter’s out-of-pocket expenses) and the gross spread (the underwriting discount, pay the underwriter’s fees or expenses)
- Letter on Intent, three parts: underwriter’s commitment to the company, company agreement to cater all information and cooperate, and company’s agreement to present underwriters a 15% over allotment option
- Underwriting Agreement, when the price of shares is decided, the underwriter is legally able to buy shares at the agreed-upon price
- S-1 Registration Statement, required submission to the SEC (Information Required in Prospectus, and Information Not Required in Prospectus)
- Red Herring Document, includes information about the issuing company’s operations and prospects except for key issue details (i.e., price and number of shares)
3. IPO Roadshow
The IPO Roadshow is the traveling sales pitch or promotion made by the underwriters and the issuing company. The underwriters and issuing company travel to diverse locations to display their IPO. The purpose of traveling to various locations is to market their shares to investors to see if there is any potential demand. Observing at investor interest, the underwriter can better estimate the number of shares to present.
4. Pricing
Once the IPO is approved by the SEC, the effective date of the company going public is decided. The day before the effective date, the underwriter and issuing company determine the offer price and the specific number of shares to be sold. Making the decision of the offer price is extremely important because it’s the price at which the issuing company raises capital for itself. There a few factors to consider when considering the price of an IPO:
- Success/failure of the IPO roadshow
- Reputation of issuing company
- Company’s goal
- Condition of the market economy
It is not uncommon to see an IPO underpriced because investors expect the price to surge which then increases demand. To add, it also reduces the risk investors take by investing in an IPO, which could conceivably drop.
5. Going Public
Now that all of the paperwork is finished, pricing is decided, etc., it is time for the IPO to go live! On the agreed-upon effective date, the underwriter will discharge the initial shares to the market.
6. IPO Stabilization
Once the IPO goes public, the underwriter has a short window of opportunity to influence the share price. There is a 25-day “quiet period” which occurs immediately after the IPO goes live and there are no rules that could prevent any manipulation. The underwriters job is to make sure there’s a market and buyers in order to maintain an ideal share price. A couple strategies used by underwriters are as followed:
- Greenshoe option, allows underwriters to sell more shares than originally planned and then buys them back at the original IPO price. A very popular choice because it’s both SEC-permitted and risk-free. Also known as the over allotment option.
- Lock-up period, predetermined amount of time (90 and 180 days) where insiders who owned shares before the company went public are not allowed to sell their stock. Bypasses flooding the market with company shares and driving the price down.
7. Transition to Market Competition
The final stage of the IPO process, also known as the transition to market competition. This transition occurs 25 days after the initial public offering, and once the “quiet period” mandated by the SEC ends. Everything is now public, and out of the underwriter’s hands. The underwriter can administer the company with estimates on the company’s earnings and post IPO-valuation. Hence, the underwriter speculates the roles of advisor and evaluator once the matter has been made.
IPO Transfer Agent Services
https://www.colonialstock.com/ipo-transfer-agent.htm
The IPO Registration Statement Package includes the initial Registration Statement (S-1, etc.) filing, amendments, and correspondence filings through qualification, all for a flat-rate with 10% discount if you utilize our transfer agent services.