Preparing for the IPO

Hiring an Underwriter

The company forms an IPO team comprising underwriters, lawyers, certified public accountants (CPAs), and Securities and Exchange Commission (SEC) experts. The underwriter, typically an investment bank, advises the company on the IPO process, manages regulatory filings, and generates interest in the offering through activities like the "road show," where the bank approaches institutions or investors to create initial interest.

The underwriter can guarantee the offering by purchasing all the shares at an agreed price (firm commitment) or merely selling shares without financial guarantees (best efforts agreement).

Financial Auditing

A third-party accounting firm is then hired to conduct a complete audit of the company’s finances. The company, aided by its underwriter, assembles SEC registration documents including a prospectus, which is circulated to all potential investors, and private filings, which are for the SEC's eyes only. The registration documents include detailed financial information (including the third-party audits), information on the company's management, potential liabilities, private share ownership and its business plan.

SEC Due Diligence & Approval

The company files a registration statement with the SEC, primarily using Form S-1. This document includes:

· The prospectus, for potential investors describing the company and IPO terms

· Private filings for SEC review

The SEC conducts due diligence to verify the accuracy and completeness of the information provided. Once approved, the company sets the IPO date and agrees on the initial price and share quantity with the underwriter.

Marketing & Pricing

Marketing efforts, including presentations during the road show, estimate demand and refine the offering price. Adjustments may be made to the price or issuance date based on investor feedback and market conditions. The company must also meet public listing requirements for the chosen stock exchange.

Public Sale

Once these steps above have been met, the stock is issued for public sale.

Profit from the sale of shares depends on the agreement between the company and its underwriter. If they made a firm commitment, then all the money for each share sold in an IPO goes to the underwriting bank. If not, the company and its shareholders get the money directly.

During this process the company will also decide how much control it will put up for sale. Contrary to popular belief, a company does not have to post 100% of its equity during the initial public offering. It can sell as little or as much control of the firm as it chooses.

Post IPO

Going public provides companies with significant publicity and easier access to capital. However, it also introduces complexities. Companies must meet stringent disclosure requirements, including filing quarterly and annual financial reports. They are accountable to shareholders and must report significant activities such as stock trading by executives, asset sales, or acquisitions.

Once public, companies face ongoing disclosure obligations about their finances, taxes, liabilities, and operations. These requirements are among the top downsides of an IPO, alongside relinquishing partial control of the company. Despite these challenges, ongoing compliance with public disclosure rules makes subsequent offerings less significant.

Ways to Go Public

There are multiple paths companies can take to go public, each with its own processes and benefits.

Traditional

The traditional IPO is the most well-known method and involves a structured, step-by-step process. This approach typically requires significant time and financial resources, often taking months or even years. It involves hiring underwriters, conducting roadshows, setting the offering price, and managing post-IPO activities such as the green shoe option, street research, and lock-up periods.

SPAC

SPAC IPOs, or special purpose acquisition company IPOs, have gained traction in recent years. A SPAC is a "blank-check company" with no business operations. It goes public through a traditional IPO to raise funds quickly, bypassing the operational requirements of a standard IPO. The SPAC then has a set period, usually two years, to identify and acquire a private company, effectively taking it public. SPACs became more popular in 2020 amid market uncertainty, offering a faster and more flexible route to public markets.

Direct Listing

This type of IPO cuts out the middle man. Unlike a traditional IPO, there are no underwriters. Direct listings are known for being cheaper and faster. In this method, existing employee and investor shares are listed directly onto the exchange. They’re ideal for established companies with a loyal customer base. Direct listings can save money and avoid diluting existing ownership.

Reverse Merger

A reverse merger involves a private company acquiring a dormant public company, often referred to as a "shell company." This process is like a SPAC, but with one main difference: the private company takes the lead in acquiring the public entity rather than being acquired. Reverse mergers offer a relatively quick and straightforward way to become a publicly traded company, though they lack some of the regulatory scrutiny of traditional IPOs.

Dutch Auction

Unlike other methods that rely on fixed pricing, a Dutch auction embraces a bidding process to determine the IPO price. The company specifies the total number of shares and a minimum bid price. Investors then place bids indicating how many shares they want and the price they’re willing to pay. Shares are allocated to the highest bidders, progressing downward until all shares are sold. However, the final price isn’t the highest bid; it’s the lowest successful bid. All successful bidders pay this price, ensuring transparency and fairness in allocation.

For example, if the lowest successful bid is $150, all bidders who receive shares pay $150, even if they initially offered more.