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Taking a company public is an important decision in the lifecycle of the company. The process to go public via an initial public offering (IPO) involves a number of steps. It is necessary to note that the process may take even up to one year and that some steps in the process may overlap with others. This process is quite expensive and the company must first of all consider the cost implication of the each stage of the process and the pros and cons of going public (Draho, 2007). Going public may be a procedure to sell off shares that were previously held privately to the general investing public for the first time, or may be creating shares to be sold to the public for the first time.
An IPO requires a group of highly skilled individuals, and therefore one of the first steps is the formation of a seasoned and experienced team of professionals who will work around the clock to ensure that the issue is successful. This team of professionals include: Investment bankers, attorneys who advise the firms on meeting regulations and are responsible for drafting all the agreements, independent auditors, who verify the books of accounts and report in the financial position of the firm and an expert on the Securities and Exchange Commission (SEC) (Jenkinson, 2001). They work together with the management of the company. Contracts with each of this persons/group of persons outlining their duties, period of engagement and remuneration are drawn and signed. The investment banker is the lead transaction advisor; therefore the company must be careful to select a reputable company that will effectively market their shares. They act as the intermediary between the client and the capital markets.
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The investment banker needs to first evaluate the company to ensure that there is significant public interest in its shares. The next thing to be done is to establish whether the company can satisfy the regulations imposed by the SEC and other regulatory bodies. To this end, the company must present its intention to the SEC, which in considering the proposal takes into account compliance with the legal and regulatory framework by the company undertaking the IPO. This initial document submitted to the SEC is a registration statement which must be carefully reviewed by the attorneys to ensure that it complies with the SEC requirements on disclosure. This first step may take up to four months. During this time, persons involved in the processes should not divulge any information that is not in the public domain and issuers, company insiders, analysts, and other parties are legally restricted in their ability to discuss or promote the upcoming IPO.
The second major step is to organize the corporate and financial books and records and perform due diligence work within the company. This involves writing off worthless assets, resolving inconsistencies with the Generally Accepted Accounting Principles (GAAPs), as well as doing a financial audit of historical financial statements. Due diligence of the company is an on-goig process that will continue at every stage until the public offering is done (Damodaran, 2008). This step also involves assessment of the value of the company usually, by comparing it with similar firms which are publicly listed and also by sourcing out potential buyers to find out how much they would be willing to pay for the stock.
The determination of the eventual price of a share is very critical and will partly determine the success of the IPO. The investment banker and the management of the company should establish a mechanism for pricing and allocation of shares. Careful analysis of the determinant factors in pricing an IPO should be done (Geddes, 2008). Underwriters should attempt to reach an offering price that is low enough to generate public interest in the stock and high enough to raise an adequate amount of capital for the company. The final price reached and the modalities of allocation of the shares will be included when writing up the prospectus in the next step.
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The investment banker will most likely underwrite the share issue, by guaranteeing a specified share price and also guaranteeing that the shares offered to the public will be fully subscribed to. They assure the company that should the shares not be fully taken up by the public, then they will fully take up the balance. This must be clearly stipulated in the contract of engagement. The third step is to meet the legal requirements of the SEC and to start the writing the prospectus. As collection of data, and compiling of information required to be included in the prospectus is likely to be duplicated, this step requires being well coordinated. The drafting of the prospectus should start by the 5th month.
Part of the legal requirements involves establishing a Board of Directors (BOD) for the newly formed public company and transition contracts for services and products that will be provided to the newly formed public company. The requirement that a company wishing to be listed must comply with the SEC is meant first to protect the public against fraud and secondly to regulate it once it has gone public. Once the financial audit in step 2 above is completed, interim financial statements for the current period should be prepared. The draft prospectus should then be revised by all parties in the IPO team to ensure that all elements have been properly included.
It should include what the company does, what products it manufactures, how it has fared financially in the past and how it expects to perform in future, why it is intending to raise capital through an IPO, and what the finances it is seeking to raise will be used for. All legal aspects should be checked and confirmed by the attorneys. Since the company is going public, a certain level of disclosure is demanded to ensure that the company offering its shares provides all the necessary information for investors to make informed investment decisions. Therefore information disclosed in the prospectus should relate to the terms on which the IPO is being made.
At this stage, undergo due diligence with each of the team members. This should have been done by the 7th month. Then, finalize all historical and interim financial statements and make sure they are audited in accordance with SEC rules. The external independent auditor should give a report attesting that the audit has been performed and that the books of accounts present a true and fair view of the company's affairs. This audit is more formal than the usual yearly audits undertaken by the firm. By the 8th month, finalize the offering prospectus. This is the document that will eventually be issued to the public once the company gets approval from the SEC. The company must address any concerns raised by the SEC and agree to the final price.
In the 9th and 10th months, get the necessary approvals from the SEC and ensure that the membership with the Stock Exchange on which the shares will be floated is approved and completed. This will be looked at as the fourth step in the process. At this point, the prospectus is filed both with the SEC and the Stock Exchange. The SEC also sets reporting procedures and insider trading laws. Once regulatory approvals have been obtained, the IPO team should now start embarking on marketing the shares to the public. This may be done in a number of ways: issuing a press release, advertising on television or doing road shows. Short presentations may be arranged to be done to several categories of people like brokers, dealers and institutional investors. This step is the last step before the shares are offered, and it is meant to elicit bids from investors. The prospectus is freely distributed to the public.
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During the marketing of the IPO, the team needs to clearly highlight how long the share offer will be opened, what rules will be applied should there be a share oversubscription and the terms of payment. However, the management cannot disclose any more information other than that contained in the prospectus. Before the IPO process is over, it is necessary for the company to implement all the necessary controls, procedures and systems that are required for public companies. After the IPO, the company is more visible to the public and outsiders, it is therefore necessary that before the shares are floated, new financial systems are tested and necessary staff changes are made.
The final step in the IPO process is the actual sale of the company to investors, as supervised by the lead investment banker. Allocation of the shares is then done. If demand exceeds the number of shares on offer, then there will be an oversubscription and the shares have got to be rationed as per the provisions earlier on mentioned in the prospectus. If the shares are not fully subscribed, the underwriting has to fulfill the guarantee and buy the remaining stock at the IPO price. The IPO closes with the transfer of the stock to the new stockholders and the filing with the SEC reports pertaining to the issue of the shares.
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