- The Step By Step Process of Taking your Company Public Via IPO
- Taking your Company Public – Team Roles and Responsibilities
- Managing credit facilities after successful ipo
- Most Viewed In Markets
- 1. Data: The Lifeblood of a Successful IPO
- How to Take your Company Public – The Steps Involved
- What makes a successful IPO
- Muthoot Microfinance Ltd IPO [Listing in March 2020] - Upcoming IPO - Purchase before listing
- A Case Study of Two Companies that went Public
- UPDATE 2-Denmark's ISS may relaunch IPO after debt deal
- Snapple files for $115 million IPO
- Ajaero Tony Martins
CHAPTER NINE: Part D – The decision to go public can be one of the most important ones in a company’s history; and one of the most challenging. This explains why a company needs expert direction and assistance to launch a successful IPO.
While your company will have the opportunity to select many of the players in the IPO process (such as the auditors, investment bankers, lawyers, underwriters, accounting advisors, and stockbrokers), the SEC also plays a significant role.
The Step By Step Process of Taking your Company Public Via IPO
Now, let us discuss the roles played by each of the players that participate in the process of taking your business public.
Taking your Company Public – Team Roles and Responsibilities
a. The Security and Exchange Commission (SEC)
The SEC’s role is to ensure a fair and level playing field for public companies and their investors.
It has the authority to pursue civil and criminal prosecution against those who breach established procedures. The SEC reviews your registration statement and ultimately approves or overrules your IPO plans.
Managing credit facilities after successful ipo
It also ensures that your registration statement and prospectus adequately inform potential investors.
b. Company personnel
The level of your team’s participation in the process of preparing the IPO registration documents depends on the expertise of the members, although external professional will also play huge roles.
Even if your team members have little experience in most tasks, they will be required to provide the necessary information with which the document will be prepared. And they will be actively involved in all aspects of the registration process.
You should never underestimate the level of commitment a public offering will require of your team members, as the process will require a great deal of their attention.
In fact, their commitment can make your IPO succeed or fail.
c. The underwriter
Most of the time, underwriting is done by investment banks.
Although you can launch your IPO without involving an underwriter, this is rarely done because the process is so complex and the required expertise is so specialized.
Market issues that most people see as rocket science are the stock-in-trade of underwriters, and it is in the best interest of your company to take advantage of their offering.
The value added by an underwriter can ensure the proper management, marketing, and support of an IPO before and after its launch. The underwriter works with your company to develop the registration statement, coordinate the road show, underwrite certain risks, and form a syndicate.
The syndicate formed comprises two groups: an underwriting group, which handles the underwriting process, and a selling group, which solicits interest from its retail and institutional clients and sells your stock once your IPO launches.
Experienced underwriters and investment bankers are very much skilled at sensing what sells and what doesn’t.
And they are able to anticipate pitfalls and calculate risks. Underwriters contribute other skills and support, including:
- Experience in marketing, structuring the deal, and facilitating syndications with other co-underwriters and brokers to create support for your stock after it is issued.
- Knowledge of market conditions and various types of investors.
- Experience in pricing stock so it will be attractive to the company, but also reap a reasonable return for the investor.
- The ability to help client companies with future offerings.
- A research department that analyzes your business, your competitors, your market, and the economy as a whole.
Of course, the relationship between your company and its underwriter is mutually beneficial.
Most Viewed In Markets
The underwriter earns money from your IPO in a variety of ways. These include:
- The discount or commission: This is usually around seven percent of the proceeds from your offering. It could be up to ten percent or more for smaller or more difficult offerings, and it could as low as five percent for larger or simpler offerings in a competitive market.
- The right to underwrite for your company in future (should you launch more offerings)
- Other compensation, such as warrants to purchase stock.
The underwriter’s agreement can come in two basic arrangements.
In the first arrangement, the underwriter pledges to buy all of the stock offered in your IPO and then resells it to the public. This arrangement offers your company the most security because you will receive full sales price of the issue. In the second arrangement, the underwriter exerts effort to sell the stock, but is under no obligation to purchase the stock if there are some units left unsold.
1. Data: The Lifeblood of a Successful IPO
Your company’s independent auditors will also play a key role throughout the registration process, especially since they are strategic and technical advisors.
Therefore, at the start of the IPO process, you will need to select a reputable audit firm, especially if your company has never had its financial statements audited before.
The first audit of many young and growing businesses usually reveals accounting and financial reporting irregularities that must be rectified before the registration statement can be filed.
Your independent auditors can play valuable roles as advisors in various areas before, during, and after your business goes public.
Some of these roles include evaluating whether going public is the best step for your business, evaluating incentive compensation plans, reviewing the terms and conditions of acquisitions, addressing your company’s accounting system needs and capabilities, and tax planning.
e. Accounting advisors
Although your auditors can offer some accounting advice, your company would be better off hiring separate accounting advisors to assist in the preparation for an IPO.
These accounting advisors can assist by focusing on your business and providing the guidance and support that you will need to help you steer your company through the IPO process and beyond.
Accounting advisors will also be able to understand your company’s current state and perform an assessment of the gap between where your business is and where it needs to be in order to go public.
There are many other ways by which accounting advisors can assist you, such as making introductions to underwriters to ascertain their interest in your IPO and compiling data so that you may evaluate the compensation proposed by underwriters.
Because going public is a highly technical legal process, you will need to work closely with attorneys. Also, SEC legal work is very complex and highly specialized, and if your registration statement omits certain material facts or contains some misstatements, your company may be at risk of shareholder suits and serious penalties.
An attorney assists in preparing the non-financial sections of the registration statement and responding to the SEC’s comments.
Hiring an attorney that is highly experienced in matters involving the SEC can speed up the process significantly, thereby reducing the costs and allow for a more effective marketing process.
An attorney also works with the underwriters on a variety of subjects to assist in the due diligence process. And after your IPO, your attorney may still assist you in ongoing compliance and governance matters.
g. Transfer agents and registrars
Transfer agents and registrars help to handle the technical aspects of share issuances and transfers.
They specialize in maintaining shareholder records and issuing and canceling certificates to reflect changes in ownership.
In addition to maintaining shareholder records, transfer agents assist in processing stock transactions and coordinating shareholder correspondence and dividend payments. Since they are an intermediary for the company, transfer agents may also act as your company’s proxy agent, exchange agent, or mailing agent.
Registrars help to keep track of all issued stock and safeguard against over-issues.
h. Financial printers
The SEC maintains very strict guidelines on the acceptable format of prospectuses and registration documents, which are filed by electronic submission to the SEC’s Electronic Data Gathering Analysis and Retrieval (EDGAR) system.
Financial printers keep up to date on SEC’s requirements and are accustomed to the time constraints and confidentiality issues that their work involves.
So, they are in the best position to help prepare your company’s prospectus and other registration documents required by the SEC and submitting them.
How to Take your Company Public – The Steps Involved
Taking your business public is an intense process, which requires much to be done within a short period. This section is a brief overview of the major activities involved in the process:
Preparation of preliminary prospectus
Your team gathers business, financial, and other information that provides potential investors with full, true, and plain disclosure of all material facts related to the securities to be issued. This information is then presented in a prospectus.
Underwriters’ due diligence
Your underwriters will thoroughly review your company and its operations to ensure that the information provided in your prospectus is complete and true. This in-depth review involves discussions with your team members, inspections of significant operating facilities, and reviews of the company itself, financial information, and material agreements.
What makes a successful IPO
Application for a stock exchange listing
The next step is to apply for a listing on the stock exchange. You will need to complete the necessary documentation and provide all the information required by the stock exchange. Usually, this process runs parallel with the two previous steps.
4. Regulatory review
Your preliminary prospectus is filed with securities regulators in the jurisdictions in which you wish to sell securities.
The securities commissions will review your prospectus and send you a letter describing any irregularities detected during their review. Once the securities regulators have confirmed that your prospectus is free of deficiencies, you will be given the nod to file your final prospectus.
Although your prospectus is, in itself, a marketing document, you will need to augment it with other marketing tools. Once your preliminary prospectus has been filed, your company is permitted by securities legislation to commence limited selling efforts. During this period, your underwriter distributes materials to potential investors with the aim of soliciting expressions of interest in your offering.
Muthoot Microfinance Ltd IPO [Listing in March 2020] - Upcoming IPO - Purchase before listing
At this stage, you will hold a round of final negotiations with your underwriters just before you file your final prospectus.
Also, you will decide on the potential pricing of your offering after having evaluated your company, market conditions, comparable companies, and other important factors.
7. Finalization of documents
After having completed the final terms of your offering, you will update your prospectus to reflect the pricing information and other changes required to satisfy regulatory bodies.
When the final prospectus has been filed alongside other necessary information with the relevant securities commissions and you have been issued receipts by these commissions, your underwriters can start selling your securities.
The closing meeting marks the successful completion of your offering. You will get the proceeds of the IPO in exchange for shares of your company, and this completes the process of taking your company public. Your business will then begin its life as a public company.
A Case Study of Two Companies that went Public
Visa: A company that went public successfully
The first Visa card was issued in 1977 by a consortium of banks that would later become Visa International.
Right from the company’s earliest days, investors had waited eagerly for the American credit card company to go public. But Visa would remain privately-held for 31 years.
On March 18, 2008, Visa finally went public, announcing its IPO on the New York Stock Exchange.
Despite the global financial crisis going on at the time, Visa able to gather a whopping $17.9 billion in capital.
UPDATE 2-Denmark's ISS may relaunch IPO after debt deal
By the end of the day, Visa’s stock traded at $44 a share. The following day, it traded at $66 a share!
One major reason behind Visa’s IPO success was the close monitoring which the underwriters in charge, JP Morgan and Goldman Sachs, gave buyers.
They vetted out investors who might have flipped their own shares. This was necessary because quick resales would have harmed the company’s capital accumulation (since the market would have become flooded with already-purchased stocks).
Visa’s IPO marked is presently the largest in U.S. history and the third largest in world history. No other metrics could have better confirmed its success!
Vonage: A company that went public but failed to succeed
Vonage is an Internet telephony company that ruled more than half of the VoIP (Voice over Internet Protocol) market in North America back in 2006.
The company had spent expensively on marketing and managing several phone lines, and it was losing lots of money every quarter. Between the time it was founded in 2001 and February 2006, Vonage had lost $310 million.
The first threat to Vonage’ dominance came in 2006, when major telecom and cable companies were gearing up to offer their own VoIP products. Vonage had to do something fast.
Snapple files for $115 million IPO
And going public was deemed the right step
To raise some much-needed cash, Vonage went public on May 24, 2006, offering shares at $17 a pop.
The company was able to raise $531 million in quick capital, and this, on the surface, looked like a success.
However, instead of the normal arrangement, where IPO shares are shopped around to investment firms and individual big-ticket investors who do business with the underwriter, Vonage adopted an unusual method of offering 13.5 percent of its IPO shares directly to its customers, who would buy the shares online through a special website created by underwriting firms.
Ironically, Vonage’s dreams were shattered by a technical flop that left customers confused.
When customers tried to buy the shares online, many were told that their purchases didn’t go through. However, after a few days, when the stock price had dropped significantly, the same customers were told that purchases actually went through and that they owed the original stock price of $17 a share.
Angry, the customers filed and won a class action suit against the underwriters, which amounted to about $800,000 in fines and restitution.
Vonage later faced another lawsuit for misleading investors. Overall, Vonage’s attempt at going public ended in a fiasco.
Ajaero Tony Martins
Founder / Publisher at Profitable Venture Magazine Ltd
Ajaero Tony Martins is an Entrepreneur, Real Estate Developer and Investor; with a passion for sharing his knowledge with budding entrepreneurs.
He is the Executive Producer @JanellaTV and also doubles as the CEO, POJAS Properties Ltd.