Ipo & the Sec Essay

The process through which a privately held company issues stock to the public, known as an Initial Public Offering or IPO, transforms a business from a privately owned and operated entity to one that is owned by public stockholders. This will provide a business with access to the public capital market and increases their credibility and exposure. It does have a few drawbacks, such as loss of flexibility and control for management. Going public may be the only avenue for a business to raise funds to expand, or it could be the business founders’ wish to cash in on their early investment.
In order for a privately held company to issue stock to the public, it must first apply to the SEC for permission through a complex process that will require the company to disclose a variety of information. This process can take six months to two years and cost between fifty thousand to two hundred fifty thousand dollars in fees and expenses. Due to the substantial investment of time and money, experts caution to consider alternatives such as venture capital, limited partnerships, or joint ventures before attempting to go public. Only after such efforts, and with the awareness of how an IPO will affect their future financing, a business may approach this with careful consideration and planning.
The ideal candidate to issue shares of stock to the public would be a small to medium sized company in an emerging industry with at least ten million dollars in annual revenues, a profit margin of ten percent or better, ten percent annual growth, and a debt to earnings ratio of no more than twenty five percent.
The first step in the process is to select and underwriter to be the intermediary between the company and the capital markets. Then an underwriting team must be assembled consisting of attorneys, independent accountants, and a financial planner. An initial registration statement must be prepared per SEC guidelines with a Prospectus and financial statement to include a management analysis that exposes the risks to potential investors. All of this, of course, must be intended to convince potential investors that your company is a good investment.
The registration statement is then sent to the SEC for review, a process which could take up to two months. Company attorneys remain in contact with the SEC during this time to learn of any necessary changes. The SEC will scrutinize all documents and analyses as well as conduct an audit of company financial statements.
This review period is sometimes called a “cooling off” or “quiet” period. During this time the company makes controlled efforts to market the offering. They make “road shows” where the owners and managers travel around with the preliminary prospectus and make presentations to potential investors. They are only allowed to disclose the information contained in the prospectus at this time. The company can also file various forms with different states in which the stock will be sold. They must also hold a “due diligence” meeting to review the financials one last time.
At the end of the cooling off period the SEC provides comments on the initial registration statement. Then the company must address the comments, agree to a final offering price for the shares, and file a final amendment to the registration statement. Although the sale of stock is supposed to be effective after twenty days, the SEC usually lets it become effective immediately. Supervised by the lead investment banker, the selling of shares begins on the official offering date and continues for seven days. The investment bankers are permitted to “stabilize” the price of the security by purchasing shares in the secondary market during the offering period, a process known as “pegging”, and this is allowed to continue for up to ten days after the official offering date.
After the successful Offering, the underwriter distributes funds and settles expenses. Then the transfer agent is authorized to forward the

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