CHAPTER 2 The IPO process
improved liquidity of private or restricted securities, there are significant advantages to be gained as a result of being a public company. Aside from the immediate capital-raising opportunity of the IPO, going public will create a liquid public market for the issuer’s securities. The issuer’s security holders will have an opportunity to monetise their investment in the company. The issuer also will have an acquisition currency and be able to use its stock as consideration in a strategic transaction. After the IPO, the issuer also will have many more capital-raising alternatives. All of these advantages will have to be weighed carefully against the costs of undertaking an IPO, as well as the burdens and expense of life as a public company. A bit of this calculus has been made easier for companies that qualify as EGCs. An EGC will have the opportunity to pursue an IPO through an initial confidential submission process. Should the issuer determine that the market will not be receptive to the offering, or that other alternatives are more appealing, it can withdraw from the process without the stigma of a failed deal. In addition, an EGC may benefit from the disclosure accommodations made available by the JOBS Act. As a public company, an EGC also will have the opportunity to ease into many corporate governance requirements. This phase-in approach may result in important cost-savings for an EGC. Also, the EGC will have the benefit of getting accustomed to life as a public company and adding additional staff or retaining service providers before it has to comply with some of the more burdensome requirements. In addition to changing some of the dynamics that
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might figure into an issuer’s decision-making about an IPO, the JOBS Act also has changed the IPO process itself for EGCs. Below, we discuss briefly the IPO process and highlight along the way a number of the most important decisions that an EGC should consider, and conclude by discussing the opportunities for an issuer that qualifies as a foreign private issuer, or FPI, arising from the JOBS Act.
s we discussed in the Introduction, there are important considerations to be analysed in connection with pursuing an IPO. Even given many changes in the capital markets, and the
Pre-IPO planning Even though an EGC will have an opportunity to submit its IPO registration statement through the confidential submission process, and proceed on a confidential basis without a public filing, the issuer will still have to undertake a fair bit of planning before committing to proceed with a filing. Most companies will have to make legal and operational changes before proceeding with an IPO. A company cannot wait to see if its IPO is likely to be successful before implementing most of these changes. Many corporate governance matters, federal securities law requirements (including Sarbanes-Oxley) as well as applicable securities exchange requirements must be met when the IPO registration statement is filed, or the issuer must commit to satisfy them within a set time period. A company proposing to list securities on an exchange
should review differing governance requirements of each exchange, as well as their respective financial listing requirements before determining which exchange to choose. Similarly, an issuer will want to consider whether to retain additional senior management or enter into employment agreements with key executive officers and systematise its compensation practices. An issuer must also address other corporate governance matters, including board structure, committees and member criteria, related- party transactions, and director and officer liability insurance. The company should undertake a thorough review of its compensation scheme for its directors and officers, as well, particularly its use of equity compensation. The issuer also will want to review all prior securities issuances for compliance with federal and state securities laws, including the limits of Rule 701.
Primary and secondary offerings An IPO may consist of the sale of newly issued shares by the company (a primary offering), or a sale of already issued shares owned by shareholders (a secondary offering), or a combination of these. Underwriters may prefer a primary offering because the company will retain all of the proceeds to advance its business. However, many IPOs include secondary shares, either in the initial part of the offering or as part of the 15% over-allotment option
JOBS Act Quick Start 25
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