An Initial Public Offering (IPO) is a way to open up your private corporation to sell public stocks and gain equity capital from investors. The process of going private to public can be a long regulatory journey, but the potential benefits usually make it worthwhile. Chief among these are increased visibility, access to additional funding, an exit for investors and founders of the company, and of course, growing your company. Here are some considerations for companies considering an IPO:
Regulations and Compliance
Going public involves complying with many regulatory requirements. This kind of exposure needs a big team to tackle all of the new practices and procedures. Working with legal counsel and accounting professionals experienced in IPOs and the subsequent liabilities would be a wise decision before diving in head-first. Here’s an overview of some basic compliance measures:
Before even mentioning that your company plans to go public, there is a lot of documentation that must be filed with the Securities and Exchange Commission (SEC). The registration statement consists of a prospectus for potential investors, as well as the completion of specific forms and documents that must be filed with the SEC for review. Before sharing this information publicly, the SEC must first review the registration statement and declare it as “effective.” A company must make sure that it has complete documentation for all past significant transactions, as well as a process for documenting significant transactions going forward.
Investing in a public corporation has substantial risks which is why there are strict regulations on how they function. These compliance metrics impact day-to-day functioning of the company, which is why we suggest startup companies follow them for scalable governance practices. Some of the regulated practices include board composition, board review and oversight, and disclosure requirements to ensure transparency and accountability.
As a publicly-traded company, the company must provide regular financial reporting under the Exchange Act, including quarterly and annual financial statements, to regulatory organizations like theSEC. It is important to have strong financial controls, reporting policies, and documentation to ensure accurate and timely reporting and avoid potential liability.
Is Going Public Necessary?
Going public is not an easy choice to make and may not be the best choice for every company. Like with any major business decision, being informed of the pros and cons and realistically applying them to your unique situation is a great first step. Before going public, here are some additional considerations:
- Loss of Privacy: At face-value this is a given, but the level of publicity may surprise some people. Potential shareholders and competitors will have access to information like financial statements, your customers, and suppliers.
- Loss of Control: A private corporation can have a lot of flexibility when it comes to managing the company’s day-to-day operations. Having shareholders means that every choice has public consequences that could jeopardize the stock valuation.
- Additional Responsibilities and Costs: A public corporation is beholden to a lot of stakeholders which means that the new obligations could add unexpected costs, such as increased legal and accounting fees and liability insurance for its officers and directors. Staying SEC compliant and keeping shareholders and the market informed about the status of the business may require additional resources like an investor relations and/or public relations consultant and additional personnel.
Let Us Help
The best thing about the process of going through an IPO, is that regardless of what your company chooses, you don’t have to go through it alone. Doida Crow Legal helps companies navigate complex legal and regulatory requirements for businesses of every size. If you want to discuss IPO’s or any other business law matters, contact us online, or call (720) 306-1001 today.