An initial public offering (IPO) refers to the first time a business sells new or existing securities on the stock market, known as “going public.” Selling shares to the public can boost your company’s image while lowering your equity and debt costs. It enables your startup investors to maximize their returns and can help your corporation expand and attract skilled employees.
However, the IPO process is lengthy, and companies must meet U.S. Securities and Exchange Commission (SEC) requirements. Explore the IPO timeline and the steps involved to understand your responsibilities before and after taking your business public.
Starting the IPO process
As a company grows and increases in value, it may make sense to take it public. Conducting a registered public offering has many advantages, but it also comes with new obligations. Investopedia wrote, “Typically, this stage of growth will occur when a company has reached a private valuation of approximately $1 billion, also known as unicorn status.” But this figure isn’t set in stone.
Corporations must meet initial listing standards for national securities exchanges. According to Investor.gov, “Initial listing standards generally include a company’s total market value and stock price, and the number of publicly traded shares and shareholders of the company.” The criteria vary by the exchange.
The SEC recommended that companies consider the following factors before beginning the IPO process:
- It costs money and takes time to achieve an IPO. Check out PwC's IPO cost calculator for more information.
- Public companies have additional responsibilities after going public. These duties include providing SEC and shareholder reports.
- Failure to meet your legal obligations can create liability issues for you and your company. Additionally, you must continue to meet exchange listing requirements.
- You will no longer manage your business alone, as shareholders will have a say. A board of directors will guide your company through most decisions.
- Your financial information will be available to the public. You must file annual and quarterly reports detailing your financial status and submit Form 8-K before making major announcements.
[Read more: Employee Stock Options: How Can Your Small Business Offer Them?]
Conducting a registered public offering has many advantages, but it also comes with new obligations.
Select one or more underwriters
Investment banks (underwriters) employ financial experts who specialize inIPOs. They assign a lead underwriter, called a book runner, to oversee the process and may assign co-managers to assist with other duties. Underwriters ensure due diligence by investigating every legal element and potential risk. In addition, they oversee every aspect of the IPO process, from document preparation to issuing stock.
Orrick suggested that businesses assess underwriters by:
- Determining if the underwriter understands your company.
- Considering their ability to tell your organization's story.
- Evaluating their reputation and experience.
- Examining the quality of the underwriting team.
- Reviewing the underwriter's proposed IPO scheduled.
- Looking for any conflicts of interest.
- Asking about post-IPO support.
Develop IPO documentation and marketing materials
Your team of experts will gather data to complete the next IPO steps. A team typically involves lawyers, SEC experts, company management, underwriters, and certified public accountants. They will complete a letter of intent and file the registration statement (Form S-1) with the SEC.
After the SEC review and any follow-up activities, the group develops a preliminary prospectus known as a red herring. According to PwC’s "Roadmap for an IPO", this step occurs after about three months and must conform with SEC rules. Company executives will use the prospectus and supporting documents to woo potential investors.
[Read more: How to Give a Killer Business Presentation (Even If You're Nervous!)]
Generate interest via an IPO roadshow
Your underwriter will organize meetings at various locations, which will be attended by your management team, an investor relations representative, and potential investors. During a roadshow, you will give your sales pitch, deliver a multimedia presentation, and answer questions. PwC wrote, “This can be a very grueling process since the roadshow can last up to two weeks with several presentations a day.”
Set the initial offer price, and finalize your IPO date
Underwriters consider information gathered while on the road to set an initial price. They develop a final prospectus, file it with the SEC, and send it to potential investors. Your team will meet for a closing meeting and determine when you'll officially take your company public.
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