IPO Lawyers

Initial Public Offerings (IPOs) are the first non-private sales of securities by an issuer or an individual controlling the issuer to members of the public. In general, any offering that is not exempt under the private offering exemption of the Securities Act of 1933 (Regulation D) is considered a public offering.

Is My Company Ready for an Initial Public Offering (IPO)?

Not every company is ready for an initial public offering. Going public too soon may be disastrous for a business.

There are several issues that should be considered before an initial public offering, including:

• Does the company have the right stuff: This generally issues such as:
  • a disciplined and experienced management team;
  • strong financial control;
  • a good financial outlook;
  • a large target market;
  • a sustainable business model; and
  • a good competitive market position;
• Does the company meet the criteria set by bankers and investors: To be underwritten by a top tier investment banking firm, typical IPO candidates will:
  • be profitable or at least show a clear path to profitability;
  • have quarterly revenues of at least $15 to $20 million;
  • show signs of strong market growth;
  • have a post-IPO valuation of at least $200 million; and
  • have a proposed offering size of $40 million or more;
    • These rules, however, will differ wildly depending on the industry. If a company has an unusually innovative product or an exceptional management team, bankers and investors will probably ignore a deficiency in the other criteria;
• Would the offering benefit from additional milestones: This is essentially a question of timing. Sometimes it is better to get more seasoning, or to show greater profit growth to give investors more confidence in the company;
• Is the company prepared to operate under the requirements of going public: This is a question of confidence and whether the management team is prepared. The management team must be able to deal with the burdens of:
  • completing registration with the SEC;
  • presenting a viable business model;
  • restricting publicity during the offering process;
  • meeting SEC disclosure requirements;
  • meeting stock exchange listing requirements; and
  • relinquishing control to public investors while still maintaining profit growth; and
• Is an IPO the best route to achieving the company’s objectives: This requires a great deal of research. Other methods of raising capital and prestige are always available and are sometimes faster, cheaper, and much less burdensome;
  • Presenting an initial public offering is a very long and complicated process and also contains continuing burdens, so an individual should not engage in it if they are looking for some quick cash or five minutes of media attention.

When is the Best Time for My IPO?

The best timing for an initial public offering is probably one of the most difficult questions to answer. Having an IPO when the market is hot often provides a higher valuation and is very competitive with other companies.

However, results may falter in subsequent quarters if the market cools off, which may create frustration in management and disappointment for stockholders. This may be especially dangerous if a company is not completely ready for this type of venture.

It is also important to remember that market windows may be seasonal. Although it is simply considered a rule of thumb, in general, late August is not a good time to bring a new IPO to the market because many investors are enjoying the end of summer with their families before the school year begins for their children.

The Thanksgiving and Christmas holidays are also commonly difficult times to bring new IPO offerings.

What are the Benefits of an Initial Public Offering (IPO)?

There are numerous benefits for businesses that go public with an initial public offering, including:

• Cash: A successful IPO may 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 important for a technology or life sciences company, where providing incentives to the most highly qualified prospective employees is crucial;
• Liquidity for investors: Investors are always seeing a way to receive a higher and faster return on their investment. An IPO may be one good method of achieving that goal. Timing and restrictions on selling are very important to avoiding a speculation bubble;
• Creation of a currency for acquisitions: Stocks may be as valuable as cash for acquiring other businesses. Stocks are also a way to minimize tax liability in a way that cash cannot;
• Access to the public market: A company that has completed its IPO may return to the public market for future financings with follow-on offerings. Using an IPO establishes relationships with:
  • underwriters;
  • financial analysts; and
  • investors;
• Enhancement of the company’s stature, perceived stability, and competitive position: One effect of an IPO is the credibility of a company’s fame, staying power, and place in the competitive market. This may help obtain good results with hesitant buyers or lenders. The media is also much more likely to provide publicity to a public company than a private one; and
• Enhancement of the company’s market value: A successful IPO exposes the company to a broad base 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 burdens and disadvantages a business may experience with an initial public offering, 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 a company to have a cooling off period in which the company is not allowed to publicize its 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 companies to disclose much more information and to allow stockholders to vote on many more 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 securities litigation: A public company may face increased exposure to lawsuits for securities fraud, especially when a major announcement of bad news is given. A class action lawsuit may take years to resolve and may result in the loss of millions of dollars;
• Loss of control: Upper management and the founders of the company will lose a great deal of control as more issues are voted on by stockholders. This may interfere greatly with an existing business plan;
• Vulnerability to a hostile takeover: If insiders do not hold a significant percentage of the company, this vulnerability is especially real; and
• Expense: In addition to possibly taking several months, the cost of going public has also risen. This creates a much riskier environment in the term after the IPO when employees may sell their stock or the company may disappoint investors.

Should I Seek Advice From an Attorney Familiar with IPOs?

Bringing an initial public offering to market is a very complex process that may make or break your company. It may be helpful to consult with a business attorney, especially one who has investment or financial experience.

Having an attorney’s assistance can save your company an invaluable amount of time and energy.