In the 1990s dot-com frenzy, initial public offerings (IPOs), the first time the stock of a private firm is sold to the public, got a little out of hand. At the time, investors could invest in practically any IPO and were almost guaranteed to make a killing—at least initially. Those who had the intelligence to enter and exit these businesses gave the appearance that investing was simple.
Unfortunately, a lot of freshly public firms, including theGlobe.com and VA Linux, had enormous first-day gains but ultimately disappointed investors over time.
The tech bubble eventually burst, and the IPO market went back to normal. In other words, investors could no longer anticipate making double- and triple-digit gains from stock flipping as they did during the early tech IPO era.
Today, there is profit to be earned in IPOs once more, but the emphasis has changed. Investors are more likely to thoroughly examine a stock’s long-term potential rather than seek to profit on its immediate rebound.
What Do You Recommend I Do to Prepare for My IPO?
For all Initial Public Offerings (IPOs), consider the following advice.
Take Into Account the Timing and Disclosure Implications of Possible Acquisitions
A privately owned firm is not often required to disclose any plans it may have to purchase more enterprises to the public. The Securities and Exchange Commission (SEC) may require a public company, or even one that is in the IPO process, to submit comprehensive information about its acquisition ambitions. This might significantly affect the acquisition discussions, the IPO itself, and how investors and underwriters see your business’s strength and potential growth.
One of the major obstacles of an initial public offering is scheduling the time of management team members who are essential to the IPO process and the firm’s operations. Carefully organize the schedule of management team members to ensure the process runs smoothly.
Inefficiencies inside the company or a delayed IPO could emerge from ignoring either. Plan ahead carefully to enable management to manage their new responsibilities and normal work.
A company is said to be “in registration” for an IPO when it has chosen its underwriters, even though this is not the case legally. When a firm is “under registration,” the SEC imposes numerous limits on its freedom to speak openly about anything related to the IPO. Work together with your lawyer to comprehend the constraints and adhere to them.
A private company’s in-house attorney frequently serves as the transfer agent and can readily replace missing stock certificates, so be careful with them. These transfer responsibilities are transferred to a qualified transfer agent chosen by the company when the firm goes public or is about to release an IPO. Because professional transfer agents sometimes charge a percentage of the value of the certificates being replaced, replacing lost certificates can become quite expensive.
Your corporation should advise all stockholders to locate their certificates or to seek replacements while they are still affordable long before this time. You should ask your lawyer to certify that all stock issuances and stock option awards comply with all applicable state and federal securities laws in order to ensure your legal safety.
Determine the Necessity for Special Accounting Work as Soon as You Can
The SEC or underwriters may occasionally ask for thorough audits of all the financial data relevant to the operations of your company. This audit could take a long time to finish, particularly if a financial statement hasn’t been completed in more than six months. To determine whether you should start an audit soon, ask your underwriter how much data it will require.
It is almost impossible to change your company’s road show after it has begun, so pay attention to the underwriters. The underwriters have a lot of money invested in your business, so they have every incentive to ensure that your IPO is a success. Additionally, underwriters are likely to have more IPO expertise than anyone else in your company. Even though underwriters frequently engage coaches to assist with presentations, ask them for assistance if you need it.
Don’t leave until after the close since, in contrast to the anxiety and excitement of the preparations, IPO closings are typically very disappointing events. When closings are staged early in the morning on the West Coast, some executives may show up and try to convert them into tiny parties, while others will simply vanish. Around this time, CEOs will all want to take vacations to get away from business and reconnect with their friends and families, whom they have been neglecting over the previous several weeks.
Make sure that all management team members, at the very least, confirm with your attorney that all documents calling for their signature have been signed. To sign any last-minute modifications to the closing paperwork, try to have at least part of them remain.
Taking Part in an IPO
Finding a firm getting ready to go public is the first step in participating in an IPO. Searches of S-1 forms submitted to the Securities and Exchange Commission are used to do this (SEC). An investor must register with a brokerage company to participate in an IPO. Companies that launch initial public offerings (IPOs) inform brokerage firms, who then alert investors.
Before participating in an IPO, investors must often meet certain requirements, according to brokerage houses. Some may state that certain investors only have access to IPOs if they have a specific amount of money in their brokerage accounts or have completed a certain number of transactions. If you qualify, the company will typically ask you to register for IPO monitoring services to get alerts when new offerings that fit your investing criteria surface.
Research Objectivity Deeply
It’s difficult to find information about companies that plan to go public. Private companies typically do not have hordes of analysts covering them, looking for any gaps in their corporate defense, unlike the majority of publicly traded companies. Though most businesses attempt to completely disclose all facts in their prospectus, keep in mind that it was still created by the company and not by an objective outsider.
Look up information on the business, its rivals, finance, previous press releases, and the state of the sector as a whole online. Even though reliable information may be hard to get by, researching the firm is an essential first step in selecting a prudent purchase. On the other side, your investigation may reveal that a company’s prospects are being exaggerated and that the best course of action is to pass on the investment opportunity.
Choose a Firm with Capable Brokers
Choose a business that has a reliable underwriter, if possible. Although we don’t claim that the major investment banks never make subpar investments public, quality brokerages are more frequently linked to quality. Smaller brokerages should be chosen with extreme caution since they might be eager to underwrite any business. In contrast to a much smaller, somewhat unknown underwriter, Goldman Sachs (GS) can afford to be considerably pickier about the companies it underwrites due to its reputation.
Due to their smaller customer base, boutique brokers have one benefit: they make it simpler for private investors to purchase pre-IPO shares. However, as will be discussed below, this benefit could also be a warning sign. Be advised that the majority of sizable brokerage houses won’t let your initial investment be an IPO. The only individual investors who participate in IPOs often are long-term, well-established, and frequently high-net-worth clients.
Do I Need a Lawyer to Help Me With More Advice?
Undoubtedly, an attorney must be essential to your IPO team. A competent business lawyer can simplify the IPO process and make it as effective as possible. Ignoring the thorough advice of an attorney can result in the fight of your life with the SEC.
