Going Public Process

The process of going public requires preparation well in advance of the actual offering (Lybrand, 1992), (Kleeburg, 2005), (Ernst & Young, 1995). In fact, management should begin planning for an initial public offering as soon as it foresees the possibility, rather than when the need is immediate. Planning for a public offering of securities should start as quickly as possible. Whether the company is considering going public within the next six months or in three years, it will have to consider a variety of factors.

Early attention to these considerations can help reduce many of the costs and burdens of an IPO.

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Once company has decided to go public, it must consider the steps needed to ensure a smooth transition from private to public. It may need to do some corporate house-keeping, even house-cleaning. It usually takes three to five months from the time a company decides to go public until the time it receives the proceeds from an offering.

The length of this period depend on, among other things, the readiness of the company to go public, the availability of the information that must be disclosed in the registration statement and the market conditions.

As part of the IPO preparation, an issuer must hire the necessary advisors: an underwriter, an auditor and legal counsel. The underwriter is the most important advisor because of the intermediary role plays between the issuer and investors.

The Underwriter : The investment bank is a vital cog in a successful IPO. IPOs

generally involve one or more investment banks known as "underwriters". The company offering its shares, called the "issuer", enters a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell these shares. Selecting an underwriter first requires identifying the banks that can lead manage the IPO process. The underwriting market for IPOs is dominated by traditional investment banks, whether independent like Goldman Sachs or Lehman Brothers, or bought by commercial banks, like First Boston (Credit Suisse).

Underwriters of the company play the central role in actually selling the company’s securities. Selecting the right managing underwriters is the key ingredient for a successful IPO and managing underwriter will have the primary responsibility for determining the initial price of the shares to be sold. For some small companies, the

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reputation of the underwriters can be one of the most important factors investors consider in evaluating the IPO. A variety of firms actively underwrite IPOs.

Auditors and Lawyers : Auditors and lawyers also play important roles in the IPO

process. The service provided by auditors and lawyers to the issuer during the IPO process are necessary and vital for a successful public offering. However, the economic impact of these services and the intangible qualities auditors and lawyers provide are minor next to the underwriter. The principal benefit of prestigious auditor is the certification it conveys about the issuer quality. Prestigious auditors demand that the financial statements provide the most accurate reflection possible of the issuer’s financial health to avoid a potential lawsuit.

Legal counsel offers little in the way certification benefit to issuers, but their negotiating skills and experience can have an impact on the IPO outcome. Experienced lawyers, especially those who have dealt with post – IPO litigation, may be inclined to argue for more risk factors in the prospectus and more negative overall tone to protect the issuer from legal liability.

The SEC : The final step in the registration process, before your securities are

sold, is to obtain clearance from the SEC. The SEC is not responsible for evaluating or regulating the quality of securities offered to the public. Rather, it attempts to protect the public interest by ensuring that adequate information is provided to prospective and current investors to allow them to evaluate the quality of your securities.

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The SEC was established by Congress in 1934 in response to the stock market crash of 1929. The SEC administers federal securities legislation, including the 1933 Act and the 1934 Act (Lybrand, 1992).

STEPS IN THE IPO PROCESS

Preparing and filing the initial registration statement with the SEC SEC review, resulting in SEC letter of comment

Preparing the amended registration statement Preparing the preliminary prospectus or “red herring”

Holding financial analysts’ meeting or “road shows”

Holding the due diligence meeting

Negotiating and signing the price amendment and underwriting agreement Closing

Table 1 Steps in IPO Process

The Registration Process : The registration process begins, for the SEC Securities and Exchange Commission’s purposes, when the company reached a preliminary understanding with an underwriter on proposed public offering. From that point on, the company become subject to SEC regulations on what the company may and may not do to promote the company. Registration is ultimately affected by the filling of a final registration statement with SEC.

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The registration statement consists two parts: Part I is the prospectus which is widely distributed to underwriters and prospective investors. Part II contains additional information which is required by, and provided to, the SEC. the entire registration statement becomes part of the public record and is available for public inspection.

Various registration forms are specified or allowed in different circumstances. A registration statement usually requires a considerably period of time to prepare. The statement must contain all disclosure, both favorable and unfavorable.

The Quiet Period : Once a preliminary understanding with the underwriters has

been reached, a quit period begins during which the company is subject to SEC guidelines regarding publication of information outside of the prospectus. The opportunity to enhance awareness of the company, its name, products and geographic markets will be limited, since any publicity that creates a favorable attitude toward to securities could be considered illegal. There are two time windows commonly referred to as "quiet periods" during an IPO's history. The first and the one linked above is the period of time following the filing of the company's S-1 but before SEC staff declare the registration statement effective. During this time, issuers, company insiders, analysts, and other parties are legally restricted in their ability to discuss or promote the upcoming IPO (U.S. Securities and Exchange Commission, 2005).

The other "quiet period" refers to a period of 40 calendar days following an IPO's first day of public trading. During this time, insiders and any underwriters involved in the IPO are restricted from issuing any earnings forecasts or research reports for the company. Regulatory changes enacted by the SEC as part of the Global

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Settlement enlarged the "quiet period" from 25 days to 40 days on July 9, 2002. When the quiet period is over, generally the underwriters will initiate research coverage on the firm. Additionally, the NASDAQ and NYSE have approved a rule mandating a 10-day quiet period after a Secondary Offering and a 15-day quiet period both before and after expiration of a "lock-up agreement" for a securities offering.

The Waiting period : Once the registration statement has been filed, the waiting

period begins, it continues to the effective date of registration. During this period, there are restrictions on the activities the company and the underwriter can undertake. At this time, the underwriters begin actively soliciting investors who may be interested in purchasing the company’s securities, but the preliminary prospectus in the only written literature permitted.

SEC Review : Registration statements filed by first – time issuers are reviewed by SEC staff specialists- generally consisting of an attorney, an accountant and financial analyst. The group may also consult with other staff experts familiar with a particular industry. The staff reviews the documents to determine full and fair disclosure, particularly whether the document contains misstatements or omissions of material facts. The SEC review, however, cannot be relied upon to assure the accuracy or completeness of the data.

The review of financial data is performed by staff accountant who reads the entire prospectus and the remainder of the registration statement to become familiar with the company and its business. The staff accountant may also refer to published annual and interim reports and newspaper articles for information regarding the

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company and its industry. This review is primarily directed at the financial statements and other financial data and the independent accountant’s report. Its purpose is to determine whether the data comply with SEC requirements and the applicable pronouncements of the American Institute of Certified Public Accountants and the Financial Accounting Standards Board, as well as with various SEC staff interpretations and policies dealing with accounting and auditing issues.

The SEC has developed and adopted review procedures that provide for SEC issuance of comments to registrants without formal proceedings. The informal comment techniques has proved to be an effective method of communicating and resolving questions and defects before permitting a registration statement to become effective.

After review of the registration statement, the SEC typically issues a letter that sets forth questions, deficiencies and suggested revisions. The letter, referred to as a letter of comment, is generally mailed to company’s legal counsel (Kleeburg, 2005).

The Due Diligence Meeting : After the registration statement is filed, before it

becomes effective, the principal underwriter holds a due diligence meeting. The due diligence meeting is attended by the principal underwriter and often by members of the underwriting group, as well as by the company’s principal officers, counsel for the company, counsel for the underwriter and the independent accountant. The usual procedure is for the underwriters to question the company representatives on the company and its business, products, competitive position, recent developments in finance, marketing, operations and other areas, and future prospects.

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Due diligence meeting are held to reduce the risk of liability associated with a filing by giving faith effort to ensure that all material matters have been included and have been fairly stated in the registration statement. The due diligence meeting is an important safeguard, as the company and its principals may be held civilly liable for untrue or misleading statements or omissions of material fact that cause a registration statement to be misleading.

Closing : The closing date – generally specified in the underwriting agreement –

is usually 10 days to two weeks after the effective date of registration statement. At the closing, the company delivers the registered securities to the underwriter and receives payment for the issue. Various legal documents, as well as an updated comfort letter prepared by the independent accountant, are also exchanged.