Initial Public Offerings

The first non-private selling of securities to the general public by the issuer or a person in control of the company is known as an initial public offering (IPO).

In general, a public offering is any offer that is not excluded under the Securities Act of 1933’s (Regulation D) private offering exemption.

What Procedures Must Be Followed Before an Initial Public Offering?

Before a business can issue stock to the public, there are a number of procedures that need to be followed. The general outline of what needs to be done is as follows:

• Calculating the company’s value: In order to draw institutional investors, a company must typically be valued between $50 million and $100 million after a public offering. The value of your own business can be ascertained effectively by evaluating similar businesses.
• Choosing the size of the offering: To draw institutional investors, the offering must be at least $15 million in value and include more than 2 million shares.
• The choice of managing underwriters: Choosing the right managing underwriters is a crucial and challenging undertaking. Issuers ought to seek out managers that are both reputable and sizable, but who also have the time and dedication to handle each client with individualized care.
• Estimating the time to market: The preparation of the registration statement and prospectus contained in an IPO filing normally takes six to ten weeks, plus a further five to seven weeks to complete the regulatory review process. Since financial statements cannot be older than 135 days from the effective date of the IPO, issuers must synchronize this timeline with their company’s financial reporting periods.
• Putting in place a quiet period: Once the decision has been made to start the IPO process, the company should stop all press and other public activity. By doing this, the possibility of unlawful practices like insider trading and other types of securities fraud will be reduced.

Is My Business Prepared for a Public Offering (IPO)?

Initial public offerings (IPOs) are not appropriate for all firms, and for some, going public too soon can spell disaster. Prior to an IPO, all of the following should be taken into account:

Has the Business Got the “Proper Stuff?”
This typically entails elements like a focused and knowledgeable management team, tight financial oversight, a favorable financial forecast, a sizable target market, a sustainable company strategy, and a strong competitive edge.

Does the Business Satisfy the Standards Set by Lenders and Investors?
The typical IPO candidate will have quarterly revenues of $15 to $20 million, show evidence of significant market development, have a post-IPO valuation of at least $200 million, and have a projected offering size of at least $40 million in order to be underwritten by a top tier investment banking company.

Nevertheless, these guidelines will be very different depending on your industry. Bankers and investors will likely overlook a weakness in the other criteria if your company has an unusually creative product or an extraordinary management team.

Would More Milestones Improve the Company’s Offering?
The main issue here is one of timing. It can sometimes be preferable to gain more “seasoning” or demonstrate stronger profit growth to inspire investor confidence in your business.

Is the Business Ready to Operate Under the Responsibilities of Going Public?
This depends on the management team’s confidence and expertise. The management team must be able to:

• Manage the responsibilities of completing SEC registration
• Present a workable business model
• Limit publicity during the offering process
• Comply with SEC disclosure requirements
• Meet stock exchange listing requirements, and
• Give up control to the general public while still achieving profitable growth.

Is an IPO the Most Effective Means of Attaining the Company’s Goals?
This calls for extensive research and introspection. There are always more efficient, less time-consuming, and sometimes even faster ways to raise money and status. Don’t present an initial public offering if you want some quick money or five minutes of media exposure because it is a very time-consuming and difficult process that also comes with ongoing responsibilities.

What Advantages Do Initial Public Offerings (IPOs) Have?

With an initial public offering, a company can get a number of advantages:

• Cash: A profitable IPO has the potential to make a huge profit. The median transaction size was $106 million, with an average deal size of $316 million among the 278 IPOs that were offered between 2001 and 2003.
• Employee liquidity: Employee liquidity is crucial for technology and life sciences businesses, where it’s crucial to offer incentives to the most highly qualified potential employees. This may change significantly in the aftermath of the Enron incident, and other instances of executive overpay through stock options. Ask a lawyer if you can accomplish this with an IPO.
• Investor liquidity: Investors are constantly searching for a way to earn a greater and faster return on their investments, and an IPO is a smart way to do it. In this case, timing and selling limits are crucial to preventing a speculative bubble.
• Creation of an acquisitions currency: Stocks could be just as important as cash for buying other companies. Stocks can help reduce tax obligations in a way that cash cannot.
• Access to the public market: After completing its first public offering, a company may conduct follow-on offerings to raise more funds. By using an IPO, one can build ties with investors, financial experts, and underwriters.

Increasing a company’s prominence, perceived stability, and competitive position is one effect of an IPO. Another effect is the credibility of a company’s reputation, tenacity, and position in the market. With cautious buyers and lenders, this frequently helps to achieve positive results. A public corporation is also considerably more likely to receive media attention than a private one.

A successful IPO exposes the business to a large pool of investors, some of whom may not have known about or been qualified to buy the company’s stock. The demand for the company’s shares typically rises as a result of this exposure, raising its market value.

What Time Is Best For My IPO?

The hardest thing to answer is probably when the initial public offering will take place. An IPO used when the market is “hot” frequently leads to a greater valuation and is very competitive with other similar companies. Still, earnings can deteriorate in subsequent quarters when the market cools off, frustrating management and disappointing stockholders. This is especially risky if your business isn’t fully prepared for the undertaking.

The seasons can also affect market windows. Although it is only a generalization, late August is typically a bad time to launch a new IPO because many investors are taking advantage of their final few weeks of summer vacation with their families before the start of the school year for the kids. Christmas and Thanksgiving are also notoriously challenging periods to introduce new products.

I Want to Make a Public Offering. Do I Need an Attorney?

Yes. You must speak with a lawyer if your business is thinking about going public. The procedure is exceedingly complicated and technical due to the formalities involved in organizing an IPO.

By consulting a business law attorney, you can increase the viability of your IPO while ensuring that you don’t break any SEC rules.