Chronology: The Process of Going Public
Created by FindLaw's team of legal writers and editors | Last reviewed September 26, 2022
The process of taking a company public presents unique challenges best faced with the assistance of an experienced team. A crucial member of that team is an experienced securities lawyer. Each member of the team has key responsibilities to fulfill in guiding the company through the following process. Read along as FindLaw outlines the general chronology of going public.
- Board approval. The initial public offering (IPO) process begins with a proposal to the company's board of directors by management of the company. Management presents and discusses in detail the company's past performance, objectives, business plan, and financial projections. Management then proposes that the company enter the public market. After carefully considering the benefits and detriments of going public, the board of directors makes a decision as to whether the IPO should go forward.
- Assembling the team. Upon board approval, management of the company should begin the process of assembling the IPO team. In particular, a securities lawyer and an accounting firm should be retained as soon as possible.
- Reviewing and restating the financials. If the board of directors approves the proposal to go public, the company's financial statements for the preceding five years should be carefully reviewed and, if necessary, restated to comply with Generally Accepted Accounting Principles (GAAP). Certain transactions that are ethical and legally permissible for private companies, such as certain sale-leaseback arrangements, must be eliminated and the financial statements appropriately adjusted. The accounting firm normally assists with the review of the financial statements and the making of appropriate adjustments.
- Letter of intent with investment bank. The company should at this point select an investment bank and formalize its arrangement with the investment bank pursuant to a "letter of intent" outlining the investment bank's fees, the size of the offering, the price ranges and other parameters.
- Drafting the prospectus. After the letter of intent is signed, the securities lawyers and accountants begin the process of preparing the prospectus. A prospectus is a written document prepared for presentation to investors as both a selling document and as a legal disclosure document. The prospectus is required to contain the following information:
- A description of the business;
- A description of the management structure;
- Disclosure of management compensation;
- Disclosure of transactions between the company and management;
- Names and shareholdings of principal shareholders;
- Audited financial statements;
- A discussion of the company's operations and financial condition;
- Information on the intended use of the proceeds of the offering;
- A discussion of the effect of dilution on existing shares;
- A description of the company's dividend policy;
- A description of the company's capitalization;
- A description of the underwriting agreement.
Usually the lawyers draft the narrative part of the prospectus and the accountants prepare financial statements.
6. Due diligence. The company's investment bank and accountants will perform a detailed "due diligence investigation" of the company. They will examine the company's management, operations, financial condition, competitive position, performance, and business objectives and plan. Information regarding the company's labor force, suppliers, customers, and industry will also be reviewed. It is likely that information discovered in the due diligence investigation will result in changes being made to the prospectus.
7. Presenting the preliminary prospectus to the SEC. The preliminary prospectus must be presented to the SEC and the relevant stock market regulators. Approval of state securities commissions may also be required. The SEC usually provides its comments regarding the prospectus, normally in the form of requirements for additional disclosure or explanation, in one to four weeks.
8. Syndication. After the preliminary prospectus has been prepared and filed with the SEC, the investment bank should assemble a "syndicate" consisting of other investment banks who will attempt to sell portions of the offering to investors. The assembly of the syndicate often generates useful information as to the market for the shares and helps to narrow the share price range.
9. Road show. Company management and the investment banker often perform a series of meetings with potential investors and analysts. The road show is a formal presentation by management of the company's financial condition, operations, performance, markets, and products or services. The potential investors and analysts are then permitted to "kick the tires" by asking questions about the company.
10. Finalizing the prospectus. The prospectus must be revised in accordance with the comments of the SEC and the relevant stock market. When the SEC declares the registration effective, the company can "go to print" with the prospectus.
11. Pricing the offering and determining the offering size. On the day before the registration becomes effective and sale commences the offering is priced. The investment banker should recommend a price for the company's approval, taking into account the company's performance, the stock price of competitive companies, the success of the road show, and general market and industry conditions. The investment banker will also consult with the company regarding the size of the offering, considering such factors as the amount of capital required, investor demand, and the desired retention of control over the corporation.
12. Printing. The company should have earlier selected an experienced financial printer who has adequate printing capacity and is familiar with the SEC's regulations regarding the use of graphics. The final prospectus is sent to the printer for printing on an expedited basis.
Having a Lawyer Help Your Company Go Public
The process of going public can be complicated, with several steps and legal hoops to jump through. You'll want to make sure you have sound legal advice before engaging in the steps listed above. Contact a qualified business and commercial law attorney today for a consolation.
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