Navigating the Initial Public Offering (IPO) Process: The Official Roadmap
Launching an IPO is a major step for any business. In this guide, we examine the process involved and the benefits that can come with a successful public offering.
During the Internet bubble around the turn of the century, not a day would go by that a future Fortune 500 wasn't hitting the stock market for the first time as part of an Initial Public Offering (IPO). For those unfamiliar, an IPO involves offering new stock shares in a private company on the open market to stock investors.
Why initiate the Initial Public Offering process? For one, the IPO process is a way for private companies to raise capital or reward initial investors. Generally, the stock’s initial price is determined by the potential demand for the stock and the amount of money the company wants to raise. Once the shares open up for sale on the open market, market forces take the stock in one direction or the other, usually upwards.
Besides boosting a company’s market value, going public can provide the liquidity that short-term investors require. Additionally, completing the IPO process can help a business owner improve their retention rate, as these company shares will enhance less-than-stellar benefit packages.
Due to the legalities involved with going public, the IPO process can be unnecessarily complicated. Fortunately, the private company in question can partner with legal professionals to help streamline the process.
Advantages of going public
Before initial investors willingly concede to giving up control of their company, they’ll have to understand the benefits they can derive from doing so.
The primary benefit of initiating an IPO has to do with the opportunity mentioned above to raise capital. With this extra capital, a company can fund research and development (R&D) projects, fund business acquisitions, expand company efforts, or reward initial investors.
After introducing the company to the marketplace, a company stands to benefit from the Initial Public Offering process. In most cases, undergoing the IPO process will swing open doors and allow the company to gain market share for its products or services.
Besides boosting a company’s market value, going public can provide the liquidity that short-term investors require.
Downsides of going public
Of course, there are some disadvantages a company must manoeuvre when going public.
Firstly, there’s a significant cost associated with undertaking the IPO process. These costs include accounting and legal services to prepare for the IPO proceedings and the marketing costs of raising public awareness and piquing community interest.
Secondly, the new company's reporting requirements rise significantly. Under the scrutiny of the Securities and Exchange Commission, the company has to provide quarterly and annual financial information as a form of transparency to the government and investors.
Finally, the IPO process wrestles some management control away from initial investors/owners as a Board of Directors takes over.
The roadmap for an IPO
As was stated above, the IPO process is very complicated. For an IPO to legally and successfully make it to the IPO closing, every "i" needs to be dotted, and every "t" needs to be crossed.
If you’re contemplating taking your company public, you could probably use a roadmap to get your company where it needs to go. To help in that regard, here are the most important steps you would need to follow.
Securing the services of an underwriter
An underwriter is an investment bank specialist assigned to lead the company through the IPO process from a financial perspective. These underwriters assume the responsibility of setting the initial price. Often, these IPO players participate by selling/marketing the stock and becoming actual investors.
Setting the IPO guidelines and framework
Once the underwriter is in place, there are many legal documents and agreements that the designated parties must fill out and sign. This list of documents/agreements includes (but is not limited to):
- Underwriting Firm Commitment
- Engagement Letter and Letter of Intent
- Red Herring Document (about the company in question)
- Underwriting Agreement
- S-1 Registration Statement for SEC
- Prospectus (defines IPO)
Roadshow and price setting
This stage is when marketing personnel make presentations to top investors and brokers to drum up interest and determine potential demand. This information collected during these presentations forms the basis for setting the initial price of the offering.
The quiet period
After executing marketing-based efforts, there comes a 25 day "quiet period." During this time, underwriters are granted access to oversubscribed purchases of the stock. This window, dubbed the quiet period, is the timeframe where the "lock-up" period is set. The lock-up period, usually 90 to 180 days in length, is when insiders can’t dump their allotted shares on the market.
IPO closing is the day and time when the IPO goes to market, and stock transactions can begin. To reach this long-awaited day with ease, follow the steps outlined above.