Despite a slowed initial public offering (IPO) market following a record-breaking 2021, many private companies are still exploring IPOs and what “going public” entails. Becoming a public company provides many benefits, such as increased access to capital and enhanced credibility, but it requires extensive preparation for a successful launch.
An initial public offering occurs when a private company sells its shares to the public for the first time, and the process is typically complex and demanding for the company. This guide details the various steps involved in an IPO, as well as key considerations and frequently asked questions.
Key Takeaways
- Diligent preparation and IPO readiness assessments help identify gaps the company needs to address to align with public requirements.
- Selecting an underwriter is a vital step, as they will support the IPO throughout the journey and serve as an intermediary between the company and investors.
- A registration statement must be filed with SEC with all relevant information pertaining to the IPO.
- The roadshow provides valuable marketing exposure and the chance for investors to provide feedback and get early buy-in opportunities.
- The underwriter will help set the final share price prior to the launch date, when the private company is listed on public markets.
- The underwriter may work to stabilize the share price, so it doesn’t fall below the IPO price after listing.
How Does the IPO Process Work?
Although taking a company from private to public may seem relatively straightforward, the IPO process involves numerous steps, and the IPO timeline can range from six months to two years. As soon as the decision is made to pursue an IPO, the company should begin working to ensure the business aligns with U.S. Securities and Exchange Commission (SEC) regulations, as well as Public Company Accounting Oversight Board (PCAOB) standards.
The next step involves valuing the company and setting an initial public offer price, which company leadership may choose to do on their own or alongside analysts and investors. Following due diligence, an IPO launch date can be chosen, and an announcement can be made. Before the launch, leadership will meet with investors during the roadshow, when they are given early buy-in opportunities.
Trading begins when the market opens the day after the final share price is chosen, marking the official public offering. Within each major milestone of the process, there are key IPO steps to follow to successfully go public.
Key Steps of the IPO Process
The steps below outline the essential actions for businesses to take to streamline the initial public offering process and increase the likelihood of success. Each company is unique, and working with a trusted IPO consultant can help you tailor these steps to your specific business needs and timeline.
Step 1: Preparing for IPO
IPO readiness and preparation lay a strong foundation for the following steps. Preparing for an IPO typically involves a readiness assessment, which evaluates financial reporting, operations, internal controls, and more, to identify areas that need attention to align with public company requirements. Collaborating with third-party advisors and evaluating audit readiness may also occur during this initial preparation step.
Step 2: Selecting Underwriters
After initial preparation, you will select an underwriter, which is an investment bank registered with the SEC that offers underwriting services. During an IPO, underwriters serve as intermediaries between businesses and investors. They also determine fundraising amounts, issue securities, provide financial advice and help set the final share price. Underwriters should be carefully selected, as they play a pivotal role in the IPO process. When choosing an underwriter, consider these factors:
- Past IPO experience with companies similar in size and type
- A strong reputation and distribution capabilities
- Willingness to form a long-term relationship with the company
- Whether a regional or national perspective is needed for the IPO
Ideally, your relationship with an underwriter does not end once you’ve successfully gone public. After the IPO is complete, they should work on market-making for your company’s shares, providing research and maintaining investor relationships.
Step 3: Due Diligence and Regulatory Findings
The due diligence step involves the underwriting team performing background research on the company and its leadership to proactively uncover any factors that may impact share pricing.
At this step, the issuing company may sign contracts outlining the scope of underwriting services. Contract structures include:
- Firm commitment, in which the underwriter purchases the offer and resells the shares to the public.
- Best efforts agreement, which asserts the underwriter is solely selling securities on the company’s behalf.
- All-or-none agreement, in which the offering is canceled if all of the shares cannot be sold.
- A syndicate of underwriters, meaning multiple underwriters come together to manage the IPO, with one investment bank chosen as the lead manager.
The underwriter also initiates the registration statement with the SEC during this step. The statement outlines all relevant information pertaining to the IPO, including financial statements, insider holdings and management background.
Step 4: Roadshow and Marketing
The final months of the IPO process involve marketing and embarking on a roadshow of investor meetings to build anticipation for the public launch. During the roadshow, which lasts roughly one to two weeks, the private company pitches to potential investors and receives feedback on final pricing and terms.
Step 5: Pricing Shares
After the roadshow, and after the SEC has approved the IPO, company leadership will take investor feedback into account and decide on the offer price with the underwriter. The offer price is set the day before the effective date, or the IPO launch date. To decide on a price, businesses will consider the company valuation, anticipated demand, market conditions and roadshow outcomes.
Step 6: Launching the IPO
Launch day represents the culmination of months, maybe years, of preparation to offer shares on the public market. On listing day, trading begins, and you have officially completed an IPO.
Step 7: Stabilizing
After going public, the underwriter will work to stabilize share prices through a stabilizing bid to support the stock price. Stabilization activities occur for a short period, generally up to 30 days after launch.
Notably, investors and company insiders who owned shares prior to the IPO must adhere to the SEC’s IPO lockup period, which prohibits them from selling shares for a specified period after the launch. This time period is typically around 90 to 180 days.
Key Considerations for Navigating the IPO Process
With the time and money required to undertake a successful IPO, going public may not always be the best option. Successfully navigating the IPO process means your business:
- Has sufficient cash to undergo an IPO
- Is ready to restructure systems and reporting to align with public standards
- Can assemble the proper team to support the various steps and stages of the process
- Has a clear long-term strategy that an IPO supports
If an IPO isn’t the right next step, there are alternatives to a standard public offering.
Alternative Routes: SPACs and Direct Listings
Some companies choose to pursue acquisition by a special purpose acquisition company (SPAC), which is a publicly traded buyout company. When a business is purchased by a SPAC, it effectively undergoes an IPO without paying the associated fees and underwriting costs. Disadvantages of this method may include limited due diligence and a compressed timeline for public readiness.
A direct listing is another common IPO alternative that entails listing existing shares to raise new capital. This means the business sells shares directly to the open market while bypassing the help of underwriters or other intermediaries. A direct listing method may be best for well-known companies, as it lacks the extensive support and roadshow exposure of an IPO.
Common Challenges in the IPO Process
Executing an IPO can present numerous challenges, stemming from both internal processes and external factors. Business may struggle with:
- SOX Compliance: To maintain Sarbanes-Oxley Act (SOX) compliance, private companies must implement new controls and integrate new processes. It’s not uncommon to underestimate the scope of these changes and the time and money compliance requires.
- Accounting and Reporting Issues: Companies may need to address issues like segment reporting, a lack of a management’s discussion and analysis (MD&A), or not fully applying PCAOB accounting standards.
- Weak Internal Processes: Internal accounting systems and close processes may not be prepared for the scrutiny associated with a public company. Weak systems also inhibit scalability, which poses an even greater risk once an IPO is complete.
- Poor Investor Relations: Establishing trust with investors is essential to build long-term value and support post-IPO performance. Businesses may fail to prioritize this element of the IPO process, but attracting the right investors is vital.
IPO Process and Procedures FAQs
The following frequently asked questions and answers cover basic topics regarding the IPO process and procedures.
From decision to listing day, the IPO process can take anywhere from six months to two years. If the process is well organized, it will generally take less time.
While there isn’t a set time after filing, the process generally takes 12 to 14 weeks. The SEC must review submissions and approve the IPO before you can officially go public.
Companies may decide to go public for a variety of reasons, including access to capital to fund growth, creating liquidity for shareholders and increasing visibility and credibility with the broader market.
Company leadership and the underwriter work together to set the IPO price based on investor demand, market conditions and valuations.
An IPO creates new shares through underwriters and other intermediaries, while a direct listing sells existing shares directly to the public.
Your Guide Forward
Cherry Bekaert’s experienced IPO Advisory professionals serve as trusted advisors, guiding you throughout each step of the complex IPO process. Our team helps companies establish realistic timelines and build strategies that drive successful IPOs.
With a wide network of professionals, ranging from legal counsel and bankers to technologists, Cherry Bekaert enables CFOs to accelerate decision-making and streamline their IPO process approach. Connect with an advisor today to begin your journey toward IPO excellence.
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