► Going Public – Becoming a public company essentially changes most aspects of the company, from sharing much of its information, to having a well-rounded top management team, and satisfying analysis and shareholders on a quarterly basis.
- Exchange Qualifications of a Public Company
- New York Stock Exchange (NYSE) requires $10 million in pre-tax earnings over the last three years, and a minimum of at least $2 million in each of the two most recent years.
- NASDAQ Global Select Market requires pre-tax earnings of more than $11 million in the aggregate in the prior three fiscal years and more than $2.2 million in each of the two most recent fiscal years.
- NASDAQ Global Market requires companies have income from continuing operations before income taxes in the latest fiscal year or in two of the last three fiscal years of $1 million or more.NASDAQ Capital Market requires net income from continuing operations in the latest fiscal year or in two of the last three fiscal years of at least $750,000.
- American Stock Exchange (AMEX) requires pre-tax income of $750,000 in the latest fiscal year or in two of the three most recent fiscal years.
- The exchanges also offer alternative listing standards based on cash flow, market cap, and revenue for larger companies not meeting the pre-tax earnings’ tests.
- Factors to Consider
- Meeting certain financial qualifications set by the various exchanges.
- The appropriateness of an IPO strategy for the business and its business goals.
- Market receptivity to IPOs generally.
- Costly and time consuming process
- Distraction from daily operations
- Loss of complete control over the company for management and founders/investors.
- Pressure to meet quarterly earnings estimates of research analysts, making it more difficult to manage the business for long-term growth and predictability.
- Disclosure of sensitive information in required filings (about products, customers, customer contracts, or management) that a private company would not have to reveal.
- Loss of personal benefits: may need to reduce business with related companies, move relatives off the payroll, or reduce other “perks” to remove any appearance that insiders or others are being favored at the company’s expense.
- Higher corporate governance standards than in the past.
- A greater risk of personal liability.
- Reporting and procedural obligations since the passage of the Sarbanes-Oxley Act, many of which may be costly for a company to implement, such as internal controls over financial reporting
- A group of dissident investors could potentially obtain majority control and obtain control of the company form from the board.
- If a stock performs poorly after a company goes public, an IPO can generate negative publicity or ‘an anti-marketing event’ for the company.
- Prepare a timetable of participants, costs and anticipated time line (deal manager, legal, accounting, printing, listing, filing).
- Determine the valuation, the use of proceeds, and whether the net proceeds will be sufficient to implement the earnings path.
- Create the Business Description and Draft the Prospectus.
- Complete business plan (highlighting its strengths, strategy is, the market opportunity, and why this is a good investment over the long term) that will become the basis for the principal offering document: the IPO prospectus
- A two-page summary
- A power point slide show
- Management Team
- The senior management team must have considerable financial and accounting experience to comply with complex financial and accounting requirements.
- Key managers should possess strong communication skills to present the company’s vision and its performance to the market, and to meet the often-intensive informational demands of research analysts and investors.
- Board of directors should have a majority that are ‘independent,’ and that the audit, compensation, and nominating corporate governance committees — to the extent they exist — be composed of independent directors. There should be an audit committee financial expert.
- Picking the Right IPO Strategy
- Reverse merger v. offering.
- Predictable revenue and earnings stream
- Market capitalization large enough to support enough trading in the stock that buyers consider that stock to be ‘liquid,’
- The current economy and the public’s appetite for IPOs.
- Financial Statements
- Under SEC rules, a company must also have 3 years of audited financial statements before it can register to go public. If a company lacks three years of audits, it can often create them ‘after the fact,’ assuming it has the records and systems in place that are ‘auditable’.
- CEOs and CFOs are required to personally certify financial and other information in their securities filings.
- Financial Projections should be prepared to insure sufficient funding, use of funds, and a realistic ability to meet earnings expectations.
- Upgrade financial reporting systems: (1) disclosure controls and procedures to ensure that information is properly captured and reported in the company’s public filings, (2) internal controls over financial reporting to help ensure that the company’s financial statements are accurate and free of misstatements.
- Select investment bankers: consider –
- The sales and distribution capabilities for successful execution of the IPO book of prospective IPO investors
- Analyst and research coverage post public
- Proper ‘fit’ personality-wise
- Knowledge and understanding of your company’s business and its industry
- Experience in your industry
What to expect:
- Stronger financial base.
- Better financing prospects from lenders and investors, providing greater access to capital.
- With market demand for the stock a company can always issue more.
- Helps attract top talent by enabling it to grant stock options or restricted stock awards.
- Stronger position for acquisitions – Public stock provides a business with the currency with which to acquire other businesses
- Valuation if the business becomes an acquisition target
- Founders, employees or other share/option holders can become liquid on their investment, subject to certain restrictions.
- Attract interest in the business and its products or services.
- Increased interest from suppliers and customers.