However, as Facebook and several other high tech companies have recently illustrated, initial public offerings (IPOs) are not without risks. In many cases, the time and money that goes into becoming a public company is more than the business owners originally anticipated. Therefore, it is imperative to go in with your eyes wide open.
A recent survey by PriceWaterhouseCoopers LLP found that “while initial public offerings (IPOs) provide companies an opportunity to reinvent themselves, many of them embark upon the process without a thorough understanding of the costs, time and complexity associated with both going public and being public.” The PWC report specifically revealed that 48 percent of CFOs surveyed reported that the one-time costs of their IPOs had exceeded their expectations.
The legal complexities of IPOs are often similarly underestimated. Becoming a public company does not simply entail an initial sale of stock to the public, but rather includes a lengthy and often complicated regulatory process. Companies must contend with both the Securities Act of 1933 and the Sarbanes–Oxley Act of 2002.
Before even embarking on the IPO process, a business may need to alter the composition of its board, develop detailed financial reporting systems, and hire additional staff. The IPO process itself involves drafting an IPO prospectus, which must be filed with the Securities and Exchange Commission, along with the IPO registration statement. Companies will also likely have to make additional regulatory filings with relevant stock exchange and the Financial Industry Regulatory Authority.
Once the SEC review process is completed, the company can move forward with the actual IPO. Of course, once the company becomes public, there are a host of additional legal issues to consider.