IPO Process USA 2005

A guide for North American companies to listing on the U.S. securities markets

Perhaps more than any other participant in the
IPO process, the investment bank is an essential
player in the success of the offering.
Indeed, the investment bank assists the issuer
in a number of critical functions: analyzing the
industry and company to determine if there is
a demand with investors for such a company,
structuring the offering, valuing the company
and developing the ‘story’ to market the offering
to investors. In a sense, the investment
bank quarterbacks the deal; heading the
issuer’s team of professional advisors and
coordinating their roles to ensure that all business
objectives are met and the company successfully
completes the IPO process.


The advantages of going public

An investment bank’s first order of business is
to assist the company in sorting out the relevant
issues and determine if an IPO indeed
makes sense and is feasible. Among the main
advantages for going public are the following:
Access to increased funding
A successful IPO creates immediate access to
the public market, potentially the deepest
source of corporate funds for any company.
In addition:
• Going forward, the company will have access
to worldwide capital markets through secondary
equity offerings and debt issues;
• By balancing equity and debt, listed companies
can enjoy greater flexibility in funding
and more favorable borrowing terms; and
• By tapping the vast pool of capital available
through the U.S. securities markets, a company
can build up a broad investor base, thus
ensuring a diverse and balanced ownership
structure. This may help to stabilize the share
price, especially during market downcycles.
Enhanced profile and marketing leverage
Public companies and their products draw much
more media attention than private companies.
• National and international financial media
such as television and newspapers (CNN,
Bloomberg, The Wall Street Journal, The
Financial Times, CNBC, etc.) provide, in
some cases, up-to-the-second coverage of
the markets and profiles of public companies.
Online media is also an instant source
of information;
• Daily stock market tables raise general
awareness of public companies;
• Broader media coverage invariably translates
into superior visibility, market share
and competitive position.
Increased investor appeal to institutional
investors in the U.S. and internationally
A U.S. listing generally leads to broader exposure
to a larger investor base – including both
retail and institutional. This in turn generates
key advantages:
• Increased recognition of the company
may stimulate greater interest in the company’s
shares;
• The rigorous disclosures mandated by U.S.
regulatory agencies further ensure transparency
and public access to all significant
information about U.S.-listed companies,
thereby promoting investor confidence.
Greater employee commitment and
recruiting ability
Incentives such as stock options, directed
share programs, and stock purchase plans –
generally unavailable to employees of private
firms – align employees’ interests with those of
the company. By allowing employees to benefit
financially from the company’s success, they
foster increased loyalty, commitment and productivity
and serve as a strong incentive in
attracting talent.
Shares as a source of finance
Once a company has gone public, it can use
its common shares to finance acquisitions of
other public or private companies, make plant
improvements and expansions into new markets
as well as compensate employees and
recruit top-tier talent – without taking on additional
debt or liquidating assets.
Liquidity for shareholders
It is generally difficult to reliably and efficiently
sell shares in a private company because no
public market exists. Thus, large blocks of
shares in private companies – or in closely
held public companies – cannot be easily
bought, sold or converted into cash in an
organized and efficient manner. The relativeliquidity of publicly-owned shares is thus a
major advantage for retail and institutional
investors alike.
Definitive valuation benchmark
Public companies can finance acquisitions
through exchanges of stock, which can be valued
by the market, thereby avoiding the difficulties
associated with determining the value of a
private company.
. . . And the case for remaining private
Notwithstanding the argument for taking a
company public, there are also these caveats
to keep in mind:
The cost
IPOs are expensive. Collectively, the one-time
and ongoing costs associated with going public
(legal counsel, accounting services, underwriting,
printing, additional personnel to handle
expanded reporting activities and investor relations)
are likely to be high. In addition, planning
and executing an IPO is a time-consuming
process that can distract management from the
company’s core business and conceivably hamper
financial performance.
Reporting requirements
Unlike privately held companies, public corporations
must file a variety of reports with the
SEC and other regulators on a regular basis.
These include:
• 10-Ks, 10-Qs and 8-Ks;
• Proxy statements; and
• Individual reporting for officers, directors
and principal shareholders.
Often, compliance with disclosure requirements
necessitates a comprehensive and costly
expansion – or outright replacement – of
existing corporate information systems.
Sarbanes-Oxley (SOX) compliance
Passed in 2002 in the wake of corporate
accounting scandals, the Sarbanes-Oxley Act
imposes a vast array of reporting and procedural
obligations on a public company and its officers.
Compliance with the law’s provisions, which
affect virtually every aspect of a company’s operations,
governance, and financial disclosure, can
be especially costly and time-consuming.
Loss of privacy
Securities laws dating back to the 1930s compel
public companies to share many types of
potentially sensitive information with competitors
and regulatory agencies. Private companies
are under no such obligation to disclose proprietary
information.
Impact of the stock price on
business strategy
As a matter of practical necessity, the management
of a public company must consider the
likely impact of business decisions on the
price of the company’s shares. As a result,
they may be constrained from making strategic
decisions that will strengthen the company
over the long-term but risk temporarily
depressing the price of the stock.
Questions every IPO candidate should ask
before going public
When is a company ready to go public?
There are prerequisites for any privately held
company that is seriously contemplating a shift
to public ownership.
Execution of a business plan
Chances are your business already has a
business plan. For the purposes of an IPO,
what a company needs is a comprehensive
roadmap that defines and assesses its growth
prospects – its products, markets, competitive
arena, business strategies, capabilities and
growth objectives – credibly, clearly and quantifiably,
and in terms that will be meaningful
to investors.
Have a credible earnings projection
model that details future growth
Before investing in a company, most individuals
and institutions want to feel confident about the
company’s growth prospects. Your company
For the purposes of an IPO, what a company needs is a
comprehensive roadmap that defines and assesses its
growth prospects.should thus be built on a product with proven
market appeal with a broad customer base and
the potential for continued acceptance.
Companies that are in mature or shrinking
industries, operate within small markets, or provide
a narrow range of products to a small and
highly-specialized customer base may be
unsuited for an IPO.
A plan for using the proceeds
By definition, a successful IPO is one that
raises a significant amount of new capital. It
is critical that (a) your need for new capital
justifies relinquishing sole ownership of your
business and bringing in hundreds, and perhaps
thousands of shareholders; (b) you have
a carefully thought-out plan for using that capital;
and (c) you communicate that plan clearly
to the investing public.
A strong management team in place
Your company's leadership should be sufficiently
skilled and experienced in the operations and
finances of the company and sector to win the
investing public’s confidence – and to fulfill your
mission as a public corporation. Similar criteria
apply to your board of directors. Furthermore,
directors and officers should understand the
accountability that is attached to the leadership
of a public company. Unlike their private company
counterparts, they must answer to hundreds
and perhaps thousands of shareholders.
In addition, the CEO and CFO regularly discuss
the business and growth prospects with the
financial community as well as address the
questions and concerns of stock analysts, business
journalists and regulators.
Solid historical financial performance
You should be able to show investors a sound
balance sheet and a consistent pattern of
top and bottom line growth over the past
several years.
What’s involved in preparing for an IPO?
Select the underwriter
The company should appoint an investment
bank as the lead book-running underwriter.
Select advisors
The company should carefully consider hiring
top-notch lawyers and accountants in order to
guide and provide advice to the company during
the IPO process.
Prepare audited financial statements
Your company’s financial statements need to
adhere to generally accepted accounting principles
(GAAP) in order to go public. Any internal
transactions, compensation arrangements
and relationships involving management or the
board that might be appropriate for a private
enterprise but improper for a public company
must be eliminated and the statements appropriately
revised. The company should consider
whether any outside affiliations (i.e., operations
tangential to the company’s core business) will
be perceived negatively by the market.
Requirements for a company going public
include:
• Two years of audited consolidated balance
sheets (plus any interim period, if applicable);
• Three years of audited consolidated income
statements (plus any interim period, if
applicable);
• Three years of audited consolidated cashflow
statements (plus any interim period,
if applicable);
• Three years of changes in stockholders’ equity
(plus any interim period, if applicable); and
• Three additional years of unaudited income
statements and two additional years of
unaudited balance sheets which will appear
in the selected financials.
Develop financial projections
The company should develop a ‘grounds up’
projections model with its business heads,
which presents the financial community with a
credible and believable plan for growth. The
investment bank will work with the officers in
the development of this model, conduct due
diligence on the assumptions behind this
model, and stress test the projections.
Determine management compensation
and stock options programs
Boards of directors and initial investors usually
hire compensation consultants to determine
compensation for top executives and employees
throughout the company. Their analysis
incorporates industry trends in addition to
compatibles and trends in the appropriate
industry and are reviewed by underwriters withan eye towards making sure the numbers are
within market expectations.
Select a board of directors, form the
board committees and appoint
committee heads
Investment banks frequently help in recruiting
board members for the company.
Establish all necessary controls and
procedures for SOX compliance
Before going public, the company has to
have certain financial controls and computer
systems in place in order to effectively run its
business. There is a specific timeline for the
implementation of certain elements of SOX in
order to be compliant, but not all need to be
completed at once.
What are the criteria for selecting
an underwriter?
There are many types of investment bank,
each suited to different types of IPOs. These
include global, full-service firms; smaller, fullservice
national firms with global capabilities;
regional firms with specialized geographic
knowledge and a variety of product offerings;
and boutique firms that specialize in a particular
industry or product.
When choosing an investment bank to
underwrite an IPO, a company should consider
a number of factors, including:
Reputation
The prestige and cachet of a top-tier investment
bank lends credibility to an offering,
especially when the issuer is not well known to
the public or to potential investors.
Experience
Has the bank ever served as a lead or co-manager
of an IPO? What is the general experience
level of the bank and how many transactions,
including IPOs, have they executed overall and
in the company's specific industry space?
Industry expertise
Does the bank have specific knowledge of the
industry? How many transactions has it completed
in that industry?
Distribution capabilities
What is the geographic distribution of the
investment bank’s sales force? In addition,
does the investment bank employ sector sales
people? Retail distribution is very important as
it provides a balance to institutional demand.
One-stop shopping
You want a bank that offers a number of services
such as equity, debt and advisory capabilities
that a big investment bank can provide.
The IPO from start to finish – a timetable
An IPO requires the coordination of many parties
including: the company, the underwriter,
the company's and underwriters’ legal teams,
auditors, printers, etc.
An IPO can generally be completed in 15
to 20 weeks. While the exact timetable will
vary with market conditions, the scope and
complexity of the deal and a myriad of other
factors, the key stages of the process generally
are as follows:
Week 1
Conduct organizational meeting and
initial due diligence
The overall purpose of the meeting is to make
sure all of the working parties understand the
structure of the offering, timing, tasks, and
responsibilities necessary to bring a company
public. These meetings are usually held in
person at the law firm or the company's headquarters
and involve discussions to make sure
everyone is on the same page regarding the
transaction, process, timetable, and all the relevant
issues. The underwriters outline a
detailed organizational book that walks through
all these issues.
Weeks 2-5
Conduct due diligence
The overall purpose of due diligence is to
ensure the accuracy, truthfulness, and completeness
of the company’s registration statement
and prospectus and to understand any
issues associated with the company. While
each of the professional advisors performs a
different role in this process, the investment
bank will focus on the diligence of the company’s
operations, management, financial
prospects, historical performance, competitive
position, and business strategy. The investment
bank will also look closely at such factors
as the company’s labor force, suppliers, customers,
creditors, and anything else that might
have a bearing on the viability of the company
as a public entity – and on the accuracy and
completeness of the prospectus.Due diligence comprises many interrelated
processes:
• Business due diligence is conducted mainly
by the investment bank and is designed to
verify the company’s business strategy and
potential for future growth. As part of this
information and fact-gathering process,
investment bankers will conduct on-site
inspections, especially for manufacturing
and property businesses. They will also
interview company officials to understand
fully every aspect of the company’s business
and its financial statements. The
knowledge gained will help underwriters
and management later craft a strong, consistent
message that can be used during
the marketing process. Business due diligence
generally focuses on such issues as:
• The overall business model and growth
strategy;
• Relevant macroeconomic trends;
• Industry trends;
• Pricing structure;
• Analysis of operating results;
• Products, markets, customers and
suppliers;
• Marketing and distribution;
• Management strategy;
• Manufacturing;
• Facilities;
• Competition and competitive position
within the sector;
• Environmental issues;
• Patent positions;
• Labor;
• Management systems;
• Management structure;
• Corporate governance, including board
of directors and audit/compensation
committees; and
• Reference checks.
• Financial due diligence is geared toward confirming
the company’s historical financial
results and understanding its future operational
and financial prospects. Key focus
areas include:
• Audited financial statements;
• Capital structure;
• U.S. GAAP reconciliation and qualitative
analysis of differences;
• Breakdown of historical financials by
business;
• Detailed review of monthly/quarterly budgets
(two years) and yearly projections;
• Meetings with auditors;
• Budget versus actual financial statements
for the last eight quarters;
• Accounting policies and auditor
management letters;
• Use of proceeds;
• Financial control systems and SOX
compliance; and
• Debt covenants.
• Legal due diligence is conducted by the
attorneys and is the process of verifying the
company’s legal records, material contracts,
and litigation. Key areas of focus include:
• Litigation;
• Compliance with local, state and national
laws and regulations;
• Title to principal assets;
• Major accounts;
• Corporate structure;
• Debt covenants;
• Environmental issues; and
• Intellectual property.
Draft the registration
statement/prospectus
Before a company can be listed, it must register
its securities with the SEC. While the form
of the registration statement to be used varies
with the specifics of the offering, all companies
must meet common disclosure requirements
as well as include any additional material information
to ensure that nothing material in the
registration statement is misleading or omitted.
While the registration statement is a legal document,
it is also a marketing document to help
sell securities to potential investors. It is the
role of the investment bankers to assist the
issuer in crafting the appropriate marketing
story to sell to investors.
In particular, the registration statement
must address the following:
• Business information
• Description of the company, its business
and main products and services;• Strengths and strategies;
• General business developments over the
past several years;
• Unique or special characteristics of the
company’s business or industry and
growth strategy;
• Risk factors;
• Planned use of the proceeds;
• Description of the security;
• Underwriting; and
• Taxation.
• Financial information
• Audited financial statements for at least
the last three complete financial years
and selected financials for the last
five years;
• Depending on the actual timing of the
IPO, interim financial information; and
• Capitalization.
• Prospects – management discussion and
analysis of the company’s financial condition
and operations over the past three
years need to be included. This covers such
areas as:
• Analyses of historical financial results;
• Trends in liquidity;
• The company’s significant capital expenditures
(whether current or proposed);
• Expected sources of funding;
• Significant trends in the company’s
capital resources;
• The success or failure of specific
operations; and
• Any additional relevant trends and areas
of uncertainty.
• Management and governance
• Composition of the board of directors
and individual officers.
• Committees of the board
• D&O compensation, stock options and
interests in certain transactions.
• Capital stock – all voting, dividend liquidation,
pre-emptive, and other rights attaching
to the shares to be registered
• Full disclosure on direct or indirect ownership
or control of the company,
including the identity of shareholders
holding more than 5 percent of the
company’s shares.
• Other matters
• A description of the company’s property;
• Pending legal proceedings in which the
company is involved; and
• Relevant details on the trading market,
material contracts, exchange controls,
and other limitations affecting shareholders
and the tax position.
Legal documentation and agreements
During this stage, the company’s management,
underwriters, and legal counsel work
together to draft the necessary legal documentation.
The collective purpose of these documents
is to assure investors, regulators, and
others that the offering has been objectively
vetted for gaps, irregularities, ambiguities, misleading
statements, and other potential problems.
These include:
• Underwriting agreement;
• Comfort letter;
• Lock-up agreements; and
• Legal opinions.
Selected SOX provisions also apply immediately
but will not have direct bearing on the
company until its registration statement is
declared effective by the SEC and the company’s
shares begin trading. These provisions
include the regularly scheduled CEO and CFO
certification requirements, and the requirement
to have independent audit committee
members. Disclosure of financial experts and
internal controls and procedures under the
SEC’s rules will apply only after the company
has a reporting obligation.
Continue to prepare the issuer to become
a public company
The investment bankers will assist the company
on a number of matters critical to its transformation
into a public entity. These include
• Discussions of the valuation;
• The composition of the board of directors
and committees; and
• Internal controls, in compliance with stock
market requirements.While it is not mandated that these issues
be resolved at this stage, most companies find
it prudent to address them in their prospectus
as a way of demonstrating that adequate corporate
governance controls are in place.
Determine whether or not the company
is eligible to file with a U.S. securities
stock market
At this stage, the company needs to determine
what stock market it wants to list on and
reserve a symbol.
Weeks 6-8
Complete the registration statement and
file with the SEC
After the company's investment bankers and
other advisors have finished drafting the registration
statement, the lawyers will electronically file
the registration statement with the SEC. Once
the registration statement is filed, the company
becomes subject to the provisions of SOX. Some
of these provisions will have an immediate
impact on the company, such as the prohibitions
on loans to executive officers and directors
and the need for auditor independence.
File application to list company on
stock market
Weeks 9-16 (SEC review of
registration statement)
Receive SEC preliminary approval of the
registration statement
Approximately 30 days after the registration
statement is submitted, the SEC will issue a
series of comments in the form of a letter
regarding the registration statement. The listing
company and its advisers will then revise the
registration statement and file subsequent
amendments of the registration statement as
well as a comment letter in response to the SEC.
Subsequent rounds of comments, revisions and
amendments may ensue; the process continues
back and forth until the SEC gives its ‘preliminary
approval’ to begin the marketing and roadshow
for the offering. Because every IPO is
unique, it is impossible to predict exactly how
long this process will take. As a rule, though, the
time frame is approximately six-to-eight weeks
from initial submission of the registration statement
to the SEC to ‘preliminary approval’ to
launch the transaction. All outstanding issues
need to be resolved with the SEC and the registration
statement must be declared effective
before the IPO can be priced.
Receive stock market approval for listing
The company and its lawyers will be contacted
by the stock market that the company is
approved for listing.
Sizing and valuing the offer
The investment bank will gauge the interest
in the IPO within the investment community
and ascertain whether the IPO is indeed
viable; it will also help to determine the number
of shares to be offered and the allocations
to investors. The lead book-running
investment bank will also manage the syndicate
to ensure healthy competition and adequate
investor demand.
How many shares should be offered – and how
should they be valued and priced?
In a large measure, those decisions will be
formed by the data collected from the due diligence
and drafting steps, along with feedback
elicited from the capital markets. While the
book-building exercise figures importantly in
this step (see below), the investment bank
and company should consider these variables
as well:
• Valuation analysis (using appropriate comparable
methodologies);
• The issuer’s objectives – notably the
amount of capital it needs to raise, and the
degree of control it wishes to retain;
• The issuer’s financial performance;
• The competitive arena;
• General stock market conditions;
• Market requirements;
• The level of investor interest – both institutional
and retail; and
• Management.
While the company may want to price the
shares as high as possible, it will be at a disadvantage
if the offering fails to sell completely
and the share price drops immediately after
the initial purchase.
Marketing strategy
The underwriters will set up a comprehensive
marketing plan incorporating the companies
investment themes, in order to target
specific investors.Preparation of roadshow
slide presentation
Scripted and orchestrated by the investment
bank and the issuer, the roadshow is a
series of meetings with potential investors
in key cities across the country – and if appropriate,
overseas.
The roadshow includes a formal presentation
on the company’s business operations,
financial condition, performance, markets,
products and services, delivered in-person by
the company’s top management. It is typically
followed by a question-and-answer session. The
roadshow provides the company with an invaluable
opportunity to meet with investors face-toface,
showcase its managerial talent, and communicate
its strategy, vision and objectives.
The investment bank’s role in the preparation
of management for the roadshow includes
these elements:
• Assist the issuer in the preparation of slide
presentation;
• Rehearsals;
• Preparation of sales force education materials;
• Mapping the roadshow itinerary;
• Targeting investors for one-on-one meetings
with senior management; and
• Roadshow logistics.
Weeks 17-19
Sales force calls to investors
The role of the sales force takes on increasing
importance – through their sales forces, the
underwriters begin to contact appropriate
investors to educate them about the company
and arrange meetings with senior management.
The syndicate’s sales force informs selected
institutions of the upcoming IPO with an eye to
raising awareness of the offering before the
roadshow begins.
Launch the offering and roadshow
The beginning of the offering is kicked off by a
management presentation to the investment
bank's sales force in order to discuss the offering,
the management, business, and the
company's prospects.
Afterwards management meets with
potential investors in key cities and, if appropriate,
overseas.
Many IPO roadshows last two weeks.
Building a book of orders
No firm sales of stock are permitted until the
SEC has declared the registration statement
effective. Upon launch, the syndicate’s sales
force approaches investors and compiles indications
of interest. The book building process is
the mechanism of assessing institutional and
retail demand for the issue and in determining
the final size, timing and pricing of the issue.
The syndicate desk receives feedback from the
sales force about each investor’s demand for
stock and alters the book accordingly.
Pricing, allocation and closing
Working with the company’s senior management,
the investment bank recommends the
price at which the shares will be offered to the
market. Only when the company’s board of
directors have finalized the offering price can
final allocation take place. (The stock is usually
priced after the close of the market on the
day the registration statement is declared
effective.) Allocation is made by the investment
bank following consultation with the
company. The objective is to ensure the quality
of the investor base by allocating to
investors who are likely to hold the shares for
the long term and possibly increase their holdings
after the IPO.
Print the final prospectus
After the pricing of the IPO, the lawyers will
revise the prospectus with the final pricing and
size information, file the prospectus with the
SEC, and the investment bank will send a
copy to investors.
Week 20
Closing
The exchange of securities for funds typically
occurs three business days after pricing.
After the listing: the role of the
investment bank
Achieving a successful IPO generally marks an
exciting new chapter in the company’s life,
where it now enjoys the prestige associated
with listing on a high-profile stock market,
increased publicity, and new found access
to capital.
However, it would be a disadvantage for
the company to be complacent. Instead, the
company should actively target current and
potential investors to communicate the compa-ny’s strategy effectively. Senior management of
the company should be accessible to investors
through conferences, non-deal roadshows and
other venues to increase the company’s exposure
to current and target equity investors.
The company’s management should be prepared
to ensure that the company continues to
perform well in the long term to meet investors’
expectations. The company should also:
• Make sure the management team can effectively
communicate the company's strategy to
institutional investors and the public;
• Ensure that the company’s corporate culture
encourages compliance with its internal
controls and procedures; and
• Ensure that periodic public disclosure
filed with the SEC is timely, complete,
and accurate.
Ongoing improvements
Toward this end, the investment bank may
also provide general housekeeping advice by
continuing to monitor the company’s performance
as a listed company and by making suggestions
on possible improvements.
The investment bank can also provide
market intelligence and act as the company's
financial advisor on acquisitions and
disposals or the viability and need for any
secondary fundraisings. This includes identifying
and analyzing significant market activity
in the company’s shares and trends in the
company’s industry.
Through such activities, the investment
bank can help drive the company forward
beyond a successful IPO.


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