What Is Going Public?
Let me explain what going public means: it's the process where a company sells shares that were previously held privately, making them available to new investors for the first time—this is what we call an initial public offering, or IPO.
Key Takeaways
You need to know that going public involves several critical and sensitive steps to safeguard the company and its potential investors. During the IPO, various aspects of the company get reviewed, prepared, and submitted to the U.S. Securities and Exchange Commission (SEC) in a draft prospectus, which evolves through the vetting process. The lead investment bank you choose will gather a syndicate of other banks before putting on a roadshow for prospective investors. Once the SEC approves the final prospectus, it goes to an experienced financial printer who knows the regulations. The offering price comes from multiple factors, set by the investment banker just before the registration takes effect.
How Going Public Works
When a company goes public, it's the first chance for the general public to buy its shares. This process brings unique challenges, and I recommend handling it with a knowledgeable team leading the way. A key player is an experienced securities lawyer, but every team member has vital roles in steering the company through the IPO.
Important Note
Remember, the mandatory SEC S-1 filing doesn't always include all past financial details, so you must do extra research before investing in an IPO.
Requirements for Going Public
Going public begins with board approval: management proposes it to the board, detailing past performance, objectives, business plan, and projections, then recommends entering the public market; the board decides after review. Once approved, you assemble the IPO team, starting with a securities lawyer and an accounting firm. Next, review and restate financials for the past five years to meet GAAP, eliminating certain private-company transactions, with the accounting firm leading this. Then, select an investment bank and issue a letter of intent outlining fees, offering size, price ranges, and more. With that signed, lawyers and accountants draft the prospectus, which acts as a selling and legal document, including business description, management structure, compensation, transactions with management, principal shareholders, audited financials, operations discussion, use of proceeds, dilution effects, dividend policy, capitalization, and underwriting agreement.
Continuing the Process
Due diligence follows, where the investment bank and accountants examine management, operations, finances, competition, performance, objectives, labor, suppliers, customers, and industry—often leading to prospectus changes. You then file a preliminary prospectus with the SEC and relevant regulators, who provide comments for more disclosure. After filing, the investment bank forms a syndicate of other banks to sell parts of the offering, gathering info to refine the price range. Management and bankers conduct a roadshow, presenting the company's finances, operations, markets, and products to potential investors and analysts, who ask questions. Revise the prospectus based on SEC comments, and once effective, print it. The day before sales start, price the offering based on performance, competitors, roadshow results, and market conditions; the banker also advises on size considering capital needs, demand, and control. Finally, send the prospectus to an experienced financial printer familiar with SEC rules for quick printing.
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