Going Public: How Companies Become Listed on the Stock Exchanges
From Game Stop to Bitcoin, there has been a lot of excitement in the stock market recently. As such, you may be wondering, how does a company even become listed on the public stock exchanges?
Well, we are glad you asked! Gonzalo Law works with companies to go public whether they are small and just getting started to larger more established names. Whether your company is Shake Shack Inc. or Apple Inc., you must go through the process that is referred to as an initial public offering or an IPO.
Generally speaking, an IPO is the process of offering shares in a private corporation to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors, which is often essential to many corporations in need of additional funding. While going public on the New York Stock Exchange or NASDAQ is not an overnight process, we want to provide an overview of the process.
It Takes a Village: Assembling Your IPO Dream Team
It takes a village to go public, and you want to make sure you are in regular contact with your dream team. These individuals will be your trusted advisors who guide you through the IPO process. They will be protecting your interests and keeping you informed throughout the process. They will work in collaboration with you and your business team to present to investors, review the strength of any patents, and help you remain compliant in this highly regulated process. These advisers include lawyers, accountants, underwriters, a CFO, the business team, and industry experts.
Lawyers
To take a company public, a company must comply with regulations at both the state and federal levels. You will want to ensure that your legal counsel has discussed the process with you and has walked you through what will be involved in the process to prepare the company for a public offering. Legal counsel will conduct a due diligence review of your company to make sure your corporate documents and affairs are in order for the offering and the listing of your stock on the exchange. Legal counsel will also draft legal agreements, offering documents, and filings with the Securities and Exchange Commission and other regulators to ensure that you remain compliant throughout the process.
Your corporate counsel must do a thorough analysis of all company communications, website, and social media to anticipate the offering and ensure compliance with the state and federal securities rules and regulations. They also must prepare the company to answer the questions of potential investors. Legal counsel will work to ensure that all company communications with the public are clear, effective, and compliant.
Underwriters
Another crucial player in the IPO process is your underwriter. Underwriters are key to the IPO process as they are involved in every step of the IPO process, from initial document preparation to issuance of the stock. So, it is critical that you select an underwriting team that is the right fit for your company. Experienced legal counsel can provide excellent recommendations of the underwriters that can be a great fit for your company. Once you and your counsel have identified potential underwriters for your offering, the underwriters will present proposals and valuations discussing their services, the best type of security to issue, potential offering price, and other key details for your company to note. Your company can then decide on just one underwriter or several to collaborate on the different steps. Legal counsel will assist in preparing and reviewing the formal underwriting agreement to be entered into between the company and the underwriters in connection with the offering.
Financial Professionals
Your IPO team is not limited to just an underwriter and lawyers. IPO teams also include certified public accountants (CPAs), and SEC experts. In addition, an IPO transaction, a chief financial officer (CFO) is a crucial part of the transaction. They help to review the company financials, conduct a review of peer companies, and prepare projected earnings to present to potential investors.
Do Your Due Diligence!
Doing your due diligence is a crucial element in all corporate matters, but it is especially important when it comes to an IPO. Because companies looking to go public are offering shares of their stock to the general public, these companies are heavily regulated by the government. You will work closely with legal counsel and financial professionals to ensure all of the proper filings are made.
Documents
Once you have completed these early-stage items, you are now ready to file some key documents! The S-1 Registration Statement is the primary IPO filing document. The S-1 includes preliminary information about the expected date of the filing and expanded disclosure regarding the company and its management. The S-1 and other offering documents will be constantly reviewed and revised by the company, the underwriters, the accountants, and the securities regulators throughout the entire IPO process as it is crucial that this documentation is accurate.
You also need to market your share issuance. After all, what is the benefit of taking your company public if no one knows to invest in it? Underwriters and company executives will market the share issuance to estimate demand and establish a final offering price. Underwriters may revise their financial analysis throughout the marketing process. This can include changing the IPO price or issuance date as they see fit.
Compliance with Listing Requirements
As stated earlier, there are many strict regulations when it comes to taking your company public. Your company must take the steps to comply with specific public share offering requirements. Companies must adhere to both exchange listing requirements and SEC requirements for public companies. Additionally, if you don’t have a board of directors already, now is the time to form one! Your board of directors needs to approve key motions and make crucial decisions regarding the corporation. Once your board is formed, ensure that you have stringent financial reporting processes in place to report auditable financial and accounting information every quarter.
Top Three Reasons for Going Public
Despite the ongoing economic and social disruption caused by the coronavirus pandemic, 2020 was one of the best performing years for IPOs in U.S. history. During 2020, there were 480 IPOs listed on the stock market, breaking the all-time record of 397 IPOs in 2000.1 Why the surge in IPOs? The obvious primary benefit to going public is to raise capital by reaching the largest number of investors. An IPO will help you raise the funds you need to grow infrastructure and expand. For many companies, the proceeds of an IPO provide enough justification for going public, because the new capital can radically transform the growth of a company and fund a massive expansion.2 Your growing company also can use its newly issued stock to purchase other companies.3
A second key advantage to going public is an enhanced corporate image. Your company will have the prestige of being listed on one of the major U.S. stock exchanges, which both generate national and international publicity for your company and enhances its credibility as a viable investment.4 Companies typically receive considerable attention even before they go public. Third, IPOs can help a growing company attract new talent by offering public stock and stock options as part of its executive compensation package.5 This benefit also gives a young company the option to pay its executives a low salary upfront and then promise a cash payout from the IPO at a later time.
Conclusion
In conclusion, to take your company public is an exciting and rewarding experience. Working with a seasoned legal and financial team can make for a smooth and effective process.
Even if it is a process that is new to you and your business team, working with trusted professionals who will protect your interest and have a passion for the work, is an ideal option. If you have questions, consult legal counsel for specific questions as it concerns your company.
Citations
[1] Stock Analysis, “2020 IPOs”. https://stockanalysis.com/ipos/2020-list/#:~:text=There%20were%20480%20IPOs%20on,in%202019%20with%20233%20IPOs. Accessed February 15, 2021.
[2] Morgan Hunsacker. IPO Advantages and Disadvantages. IPOhub, November 28, 2017. https://www.ipohub.org/ipo-advantages-disadvantages/. Accessed February 15, 2021.
[3] U.S. Securities and Exchange Commission, should my company “go public”? https://www.sec.gov/smallbusiness/goingpublic/companygoingpublic#:~:text=Some%20of%20the%20reasons%20include,with%20the%20public%20company's%20stock. Accessed February 15, 2021.
[4] Id.
[5] Id.
Nouvelle Gonzalo is a U.S. and international corporate lawyer who works with companies across the globe. She is the managing attorney of Gonzalo Law LLC, a U.S. and international corporate law firm with offices in Florida and Ohio. In addition to the active practice of law, she has served as adjunct faculty at the University of Florida Levin College of Law where she has taught international corporate law for several years. She was recognized as a rising star by the national organization, Super Lawyers, in 2019 and 2020. Her practice areas include international corporate law, intellectual property law, and nonprofit law.
Brittany George is an undergraduate student at the University of Florida pursuing a bachelor’s degree in Business Administration with a pre-law specialization. She is also currently in the combined degree program to simultaneously obtain her Masters of International Business. She has been with Gonzalo Law since May 2019 and focuses on legal research, drafting, and editing.
