How to Go Public or How a Company Goes Public

The company is developing and the owners, the people who control the company, are looking to get more finance or at least to cash out at some point.

Generally they will track the progress of company and look into the future. The owners will try to hold on to the stock and stay private and sell at the time just before the growth curve is peaking.

This is why in some of the IPOs that we have seen recently it looks as though the growth trajectory of the company is peaking. It looks that way because the growth trajectory is peaking.

Alternatively, or perhaps at the same time, the stock market or the IPO market is rolling along and offering high prices for stocks of a like kind and this bribes the private company to come out and go public.

In any event, the company sees a public offering on the horizon. If it is smart, it will now engage a securities and corporate lawyer to clean up the corporate documents and prepare the company for the IPO. Any gaps in documentation will be plugged. New documents appropriate for a public company will be created, such as elaborate articles of incorporation with anti-takeover provisions, golden parachute employment contracts for the key employees, incentive stock option programs, corporate governance policies, etc.

An accountant should be brought in at the earliest time so that the company will have the required number of years of financial statements audited to SEC standards. As this will take years, many venture companies who know that they will go public start with a PCAOB auditor from day one.

The company will also beef up its board of directors, perhaps add an advisory board and the investor relations department will be prepped for duty with a public company.

The CFO will be tracking the IPO market and estimating whether or not there will be a window of opportunity. Comparable companies that go public will be studied for pricing and underwriter performance.

One or several investment bankers will be selected as possible lead underwriter. If the company would make an interesting deal it is likely that they will already have been approached by investment banking firms. A deal will be negotiated and a letter of intent will be signed.

The letter of intent will outline the terms of the deal, provide somethings that the company has to do to make the underwriter happy that his investors will be protected after the deal, and provide some necessary legal language.

FINRA rules limit how much greedy investment banks can charge companies, but they are generally not needed to protect strong companies with managers experienced in IPOs.

The company will then have its securities attorney prepare the registration statement, which will include the prospectus, to be filed with the SEC. The underwriter will perform its “due diligence” investigation to determine that things are as represented.

When all hands, including the company, the company securities attorney, the company's accountant, the underwriter, and the underwriter's attorney, are all happy, the document will be filed with the SEC.

From this point on the company may only raise money in limited ways, so it had better have a stash of cash on hand beyond its normal needs for cash, before it files.

The company will also enter a quiet period. It can do public relations to promote its products but not its stock. As a matter of fact, some companies have been know to increase their product public relations efforts during this quiet period and that may have the effect of increasing interest in the stock.

The SEC will comment on the registration statement and the company will revise accordingly. When the SEC is out of comments, the company may ask the SEC to release the deal for sale.

While the SEC is commenting, the underwriter is selling. He will take the preliminary prospectus that is part of the registration statement, and use it to drum up interest. This preliminary prospectus has a red legend on the front warning the reader that the prospectus is not final and is subject to amendment.

The lead underwriter will form a syndicate of other broker dealers to sell the deal. He will have “due diligence” meetings, also known as dog and pony shows. At these meetings, the company will present itself and answer questions.

Until the offering is released by the SEC, the underwriter may not accept money but he will take indications of interest, which he hopes will stand up when the deal is released.

The actual underwriting agreement, binding the underwriter to buy the stock, will not be signed until the SEC releases the deal. Until then, the underwriter can back out of the deal. This is rare but may occur if something seriously wrong is found out about the company, or if the market falls apart and the stock cannot be sold.

Finally the SEC releases the deal and the underwriter accepts money from those who said they wanted to buy. The stock will then trade.

Now the fun begins as the those who are flipping the stock, betting on a “pop” in the price, and those who want to short the stock, and those who want to buy but did not get allocations in the underwriting fight it out in the market.

Eventually, the early frenzied trading subsides and the stock trades normally. Two events then occur. First, the SEC requires the company to be in a quiet period after the release of the stock for 40 days. When that ends, the company can start serious investor relations.

Second, the underwriter will have gotten a lock up agreement from the insiders prohibiting them from selling stock for a certain period of time to allow the underwriter to sell stock to the public investors without fear of dumping by insiders. When this expires, selling will usually hit the market.

As you can see from this narrative, careful planning in the beginning, long before selecting an underwriter, pays off. The company can study out what factors the market is valuing and what it is not valuing and then seek to position itself accordingly. The company must act early to get its audited financial statements. The company will also need to assemble a team, directors, advisors, professionals, that can see it through the process.

Remember, most companies only go public once in their lifetimes. Investment bankers do many deals every year. When inexperienced companies negotiating with experienced underwriters, the outcome does not favor the company.


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