Enhanced prestige and increased capital make the IPO process an alluring decision for many private companies. However, an initial public offering requires a complex system of evaluation and requirements that must be executed perfectly. Thus, when considering a checklist for the IPO process, it’s usually rather long.
We’ve gathered some of the top points of interest in the IPO roadmap to ensure a business is prepared during the entire lifecycle of going public.
#1) Is the IPO process right for my business?
The first and most important checkpoint on the list is to really think about if the IPO path is the one you want to take. Consider all of the implications of going public and the best alternatives for your business. Ask the important questions, like:
- Can management handle everything involved in the IPO process or do they already have too much on their plate?
- Is the business prepared for the requirement of transparency and full disclosure?
- Are you prepared for the potential liabilities? Are accounting standards up to par?
- Is the finance team able to produce all the necessary financial statements (and in the right amount of time)?
- Is there adequate visibility into future financial results? Is forecasting accurate? Does your model promote predictability?
- Are insiders ready to give up control and answer to new stockholders?
#2) IPO readiness means hiring the right people
First things first, you need your mentor/s. Do not go one step further until you have chosen experienced advisors that include professional auditors and attorneys. Anyone who works with the SEC and investment bankers can typically expedite the process. It minimizes delays in the SEC review and when speed matters, quick execution is critical.
Find prospective bankers and leading analysts in the market that fit your business model. Consider the appropriate number and combination of underwriting firms and which can best get the job done if market conditions suddenly change.
Senior Management Team
Next, it’s time to build your team from within. Develop a senior management team that can operate as a public company. Consider key talent in areas like investor relations and financial reporting.
Reassess the board of directors and board committees to see if any changes need to be made to satisfy exchange listings and SEC requirements. Remember, LLPs are not eligible for going public.
Beyond a legal perspective, seek out directors who have a background in IPOs and growing a public company. Start early, because recruiting this type of skill set takes time. Fully understand the requirements of independent directors and any rules that may apply after the IPO.
Under SEC and PCAOB laws, any audit firm you use must be independent of the company going public. This establishes accountability and eliminates the risk of insider trading.
Don’t hire auditors that can compromise the firm’s independence. Understand the rules and regulations for relationships between auditors, officers, and directors. This includes whether the auditors have provided tax services in the past. It may be a conflict of interest.
When it comes to executive compensation packages, you may want to speak to a professional. To get the best people means understanding what they want for compensation. The consultant can assist in analyzing current compensation practices, including equity and non-equity incentives. Develop a compensation structure that’s appropriate for a public company. Don’t forget to include the board!
#3) Reporting requirements
Ensure any audited financial statements are close to being done. The SEC requires two full years of audited statements to qualify as an “emerging growth company”(EGC). However, most businesses are sending in three years for good measure. If you have used more than one firm for the past three years, consult both, as your current firm may need to reaudit prior years for consistency.
A business should also consider when the quarterly interim financial statements will become available and fully understand the impact this will have on the timing of all SEC filings. Unless you have been in business for a shorter time, be prepared to assemble up to three years of selected financial data. If you have undertaken acquisitions or other significant transactions, understand what else you may need to provide for financial statements, like:
- Pro forma statements
- Separate audited statements related to the acquired business
Public investors always want to know the numbers. It would behoove a private company to have all of these data points on hand prior to going public. Beyond the GAAP financials, public investors and potential stakeholders will be looking for operating metrics that senior management uses to run the day-to-day. Although investment bankedrs are helpful in this instance, a company should already have a solid set of metrics they use to gauge performance.
#4) Compliance and regulation
Use your advisory services to discuss any significant deficiencies or material weaknesses in your internal financial controls. Understand the impact this might have on the SEC review. What will they find that should be addressed now? Be prepared to discuss all of this with the underwriters and disclose this to the public market.
It’s best to identify right now, any issues in your accounting policies. Discuss this with your auditors to help address any SEC “hot issues.” These are things the SEC takes notice of that are constantly changing without formal notice. Current hot-button issues include new revenue recognition standards and “segment” reporting.
Before going public, it is critical to analyze any ongoing or potential legal disputes that could derail the entire IPO. Also, consider the impact an IPO could have on your negotiating position in these cases. Litigants are much less likely to settle for a reasonable amount if they know a business is in the middle of an IPO. If you are the one thinking about initiating a legal dispute, consider exactly how this might affect a successful IPO process.
At some point, all internal controls must be compliant with the testing required by Section 404 of the Sarbanes-Oxley Act. Consider hiring an accounting consultant to help with the transition process.
The SEC has regulatory requirements that a business seeking an IPO must publicly file material commercial agreements. A company should determine which agreements are likely to be filed and then review them for any confidentiality provisions that must be waived by the counterparty. Also, determine if any terms (after being disclosed) might be competitively harmful. Discuss with counsel the process of seeking confidential treatment from the SEC for these specific provisions.
#5) The stock market
Hire an independent valuation expert to perform regular stock valuations and determine fair pricing. This will help you price option grants going forward. Many pre-IPO businesses will perform these valuations on a quarterly basis (if not more) depending on their option granting schedule.
The stock exchange
Prior to going public, a business should fully understand the benefits of the alternative stock exchanges. These include:
- NYSE (New York Stock Exchange)
- NYSE AMEX
- AIM (London)
It’s important to analyze the listing standards of your preferred exchange to ensure the business qualifies to list there.
One hot-button issue for the SEC is the “cheap stock” analysis. This looks at whether sufficient charges have been taken in the past for stock options and equity grants. Work closely with auditors and lawyers to analyze this issue. The IRS recently announced it will be targeting companies with cheap stock exchanges in their SEC filings for Section 409A enforcement. It’s better to catch any issues now.
#6) Public persona
Going public means exactly that, in every way. Cleaning up a company’s online persona, social media, websites, and reputation is crucial prior to going public. What type of brand trust will investors have if your name is already smeared online?
Perform a real-time review of the business website to ensure that all data is current and accurate. Work with your legal team to ensure the content is consistent with SEC positions on acceptable public communications prior to an IPO and permissible web content.
Discuss with counsel the exact rules that will govern your public communications during the IPO process. Standardize all public communications to develop a consistent process for external communications and concurrently establish a good track record. This should include outside counsel reviewing any press releases and shying away from media interviews or public appearances—both of which could draw up potential equations about an IPO.
#7) In-depth analysis
Understand the provisions of all corporate documents and bylaws as they relate to an IPO. When it comes to corporate governance, ask the important questions, like:
- Who has registration rights? Who is releasing the registration statement?
- Are any special approvals required from stockholders?
- Will the preferred stock automatically convert?
- Will your underwriters require a 180-day “lock-up” agreement from stockholders and option holders
These documents should accurately reflect:
- All stock issuances in capital markets
- Transfers and cancellations
- Option issuances
- Exercises and cancellations
All underwriters and their counsel will conduct extensive due diligence on everything a company provides during the IPO process. This includes a complete review of material agreements, minute books, capitalization records, issuers, etc.
It’s best to anticipate what materials the underwriters will want to review and have these organized before they ask. Not only does this expedite the due diligence process, but failure to do so could also result in delays to your offering.
Consider hiring an online data firm to help with the delivery of due diligence materials and get the information posted early. If you have yet to analyze historic option grants, now is the time to hire legal counsel and do so. All historic option grants must comply with Rule 701 of the Securities Act.
#8) Risk management
Post-IPO, exposure to liability is significantly higher for directors and CFOs. A private company D&O insurance policy will not suffice once a business is public. Choose an experienced D&O broker and coordinate early on in the process to ensure all teams are adequately protected.
Senior management should consult with personal financial advisors to discuss options for liquidity and wealth maximization alternatives. Keep in mind, any loans from the business to executives, directors, or officers, must be repaid before any filings with the SEC.
This checklist, although extensive, doesn’t cover everything you need to know before going public. This is a case-by-case basis and success, nor profitability, is guaranteed. In many cases, especially for smaller companies or those using a SPAC (special purpose acquisition company), the process is sped up and if everything isn’t aligned, going public could spell disaster.
The key takeaway is that you can never be too prepared for the IPO process. The more time you put into studying the market and understanding an initial public offering, the more likely you are to succeed.