Advantages and Disadvantages of Initial Public Offering (IPO)

An initial public offering (IPO) is the first non-private selling of securities to the general public by the issuer or an individual who is in control of the company. Generally, public offerings are any offers that are not excluded under the Securities Act of 1933’s (Regulation D) private offering exemption.

What Are The Benefits of an Initial Public Offering (IPO)?

There are numerous benefits that occur when a business goes public with an initial public offering, including:

• Cash: A successful IPO can generate a very large sum of money. Of the 278 IPOs offered between 2001 and 2003, the average deal size was $316 million, and the median size was $106 million;
• Liquidity for employees: This is particularly important for technology and life sciences companies, where providing incentives to the most highly qualified prospective employees is critical. It is important to consult with a lawyer about using an IPO for this purpose;
• Liquidity for investors: Investors are constantly searching for ways to receive higher and faster returns on their investments. IPOs can be a successful method of achieving that;
  • Both the timing of the IPS and the restrictions on selling are very important for avoiding a speculation bubble;
• Creation of a currency for acquisitions: Stocks can be just as valuable as cash when used for acquiring other businesses. In addition, they are a good way of minimizing tax liability in a way that cash does not;
• Access to the public market: Once a company has completed its IPO, it can return to the public market for future financings in follow-on offerings. Using an IPO establishes relationships with:
  • underwriters;
  • financial analysts;
  • investors;
• Enhancement of the company’s stature, perceived stability, and competitive position: An IPO often helps a company get good results with hesitant buyers and lenders;
  • In addition, the media is more likely to provide publicity to public companies than private ones; and
• Enhancement of the company’s market value: Successful IPOs expose companies to a wide range of investors, some of whom may have been unaware of the company or unsuited to purchase its stock;
  • This exposure usually increases the demand for the company’s stock, increasing its market value.

What Are the Disadvantages of an Initial Public Offering?

There are also several disadvantages of initial public offerings, including:

• Distraction of management from operation of the company: The offering process usually takes three to five months and includes tasks that simply must be performed by management, such as the selection of investment bankers, presentations, and drafting sessions;
• Restrictions on publicity and marketing: The Securities and Exchange Commission (SEC) requires companies to have a cooling off period during which it is not permitted to publicize the impending IPO, which may lead to overhype;
  • During this time, marketing activities must be done with a constant eye on securities law;
• Compliance with SEC disclosure and reporting requirements and the Sarbanes-Oxley Act of 2002: Once a company goes public, it is subjected to a whole host of strict and intrusive disclosure laws;
• Reduced flexibility in corporate affairs: Extensive new laws have been enacted that force a company to disclose much more information and allow stockholders to vote on numerous other issues. These reduce the flexibility of management to conduct business as it sees fit and often slows the company’s corporate activities to nearly a standstill;
• Exposure to class action suits: Public companies face increased exposure to lawsuits for securities fraud, particularly when a major announcement of bad news is given. These may take years to resolve and can also result in the loss of millions of dollars;
• Loss of control: Upper management, as well as the founders of the company, may lose a great deal of control as more issues are voted on by the stockholders;
  • This may interfere greatly with an existing business plan;
• Vulnerability to a hostile takeover: This is especially an issue when insiders do not hold a significant percentage of the company; and
• Expense: The cost of IPOs has risen dramatically. This creates a riskier environment in the term following the IPO, when employees may sell their stock or the company may disappoint investors.

What Do You Recommend I Do to Prepare for My IPO?

There are numerous pieces of advice individuals should consider to prepare for their IPO.

Consider the Timing and Disclosure Implications of Possible Acquisitions

Privately owned firms are often not required to disclose any of their plans to purchase additional enterprises to the public. The Securities and Exchange Commission (SEC) may require public companies, or even companies that are in the IPO process, to submit comprehensive information about their acquisition ambitions.

This may affect the IPO itself, acquisition discussions, as well as how investors and underwriters see a business’ strength and potential growth. One of the major issues that arise in initial public offerings is the scheduling of time of the management team members who are essential to the firm operations and IPO process.

A company is considered to be in registration for an IPO once it has chosen its underwriters, even though this is not legally the case. When a firm is under registration, the SEC imposes many limits on the company’s freedom to openly discuss anything related to the IPO.

The company should seek legal assistance to certify that all stock issuances and stock option awards comply with all applicable state and federal securities laws in order to ensure its legal safety.

Determine the Necessity for Special Accounting Work as Soon as Possible

Underwriters or the SEC may, in some cases, require thorough audits of the financial data related to the relevant operations of the company. The audit may take some time to finish, especially in cases where a financial statement has not been completed in more than six months.

Underwriters have large amounts of money invested in the business, so it is important to them that the IPO is a success. In addition, these individuals are more likely to have IPO expertise than other members of the company.

It is important to ensure that all management team members ensure that all of the documents that require their signature have been signed. It is important to have at least some members of management present to sign any last-minute modifications to the closing paperwork.

What Time Is Best for My IPO?

The best timing for an IPO is probably one of the most difficult things to determine. If an IPO is used when a market is hot, it frequently leads to a greater valuation and is very competitive with other similar types of companies.

However, it is important to note that earnings may deteriorate in subsequent quarters once the market cools off, which may frustrate management and disappoint stockholders. This can be very risky if the business is not fully prepared for the undertaking.

In addition, the seasons may affect market windows. Only a generalization, of course, but August is often a bad time to launch a new IPO due to the fact that many investors are enjoying their last few weeks of summer vacation with their families before school starts.

Thanksgiving and Christmas are also challenging times to introduce new products.

Do I Need an Attorney for My Business Initial Public Offering?

If your business is going to have an initial public offering, it may be highly profitable but also very risky. In addition, it is a complex process that requires proper timing and knowledge of the process.

A business lawyer can help you throughout the IPO process. Your IPO lawyer can help ensure that no issues arise during the process by helping you with any paperwork and deadlines.