Five Tips for Getting to the IPO Plunge

Five Tips for Getting to the IPO Plunge

The number of initial public offerings (IPO’s) is down 60 percent in the second quarter of 2016. There were only 33 IPOs as compared to 72 in the second quarter of 2015. However, while the IPO market has been relatively quiet in 2016, the firms that have made the plunge have been very successful.

According to IPOScoop.com, the total return of IPOs so far this year is more than 24 percent, with only eight companies seeing stocks decline. The trend highlights that in turbulent financial times, the companies that decide to become public are often candidates with the strongest support.

Is Your Company Ready for an IPO?

Before deciding to take your company public, it is important to understand both the risks and the rewards. While businesses taking the IPO route receive the “clout” associated with being a publicly traded company, they also face costly and burdensome regulatory obligations. A 2012 survey by accounting firm PriceWaterhouseCoopers LLP revealed 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.”

Important Points to Consider

To give your IPO the best chance of success, it is important to be prepared and to go into the process with an understanding of how to best take advantage of the benefits and how to avoid certain traps. Below are a few specific tips:

• Understand the risks and benefits: IPOs are not for everyone. That’s why the majority of companies are private. Before embarking on the process, it is imperative to fully evaluate whether an IPO is the best option. Advantages include access to capital, liquidity, and greater public exposure, while the disadvantages include increased pressure to perform financially, requirements to disclose confidential information, and additional reporting requirements. Trading in your securities may result in fluctuating pricing, volume and valuation changes (both up and down) which may have more to do with how your industry or the world economy is viewed than with the prospects for or results of your company’s business. A current example of this is evident with regard to the biotech industry, which expert analysts say is trading exactly that way for much of the industry.
• Prepare early and often: A company can never be too prepared for an IPO. Prior to even registering an IPO, you must meet certain financial requirements. For example, the SEC requires three years of audited financial statements for larger offerings, although newer companies and smaller offerings may file pursuant to lesser requirements. All of the exchanges also have minimum income and valuation requirements for entry. Companies may also need to update their financial reporting systems to comply with filing requirements.
• Put your best foot forward: Your prospectus and other marketing documents are your primary opportunity to attract investors and convince them that your company is a good buy. When drafting the prospectus, issuing companies seek to promote the prospects for their companies while also meeting strict disclosure requirements for risk factors. Striking the proper balance requires input from attorneys, accountants and management.
• Call in the experts: A successful IPO requires the advice of both financial and legal experts. Whether you seek assistance from in-house staff or outside professionals, it is important to work with qualified individuals who have experience with guiding companies through the IPO process.
• Understand your regulatory obligations: An IPO involves far more than selling your securities to the public. Often the most complex part of the process is meeting your regulatory obligations under both the Securities Act of 1933 and the Sarbanes–Oxley Act of 2002. In addition to the SEC’s filing requirements, companies may also be required to record documents with the relevant stock exchanges, FINRA and State Blue Sky authorities.

Is your business considering going public? Are you still uncertain about how to approach the IPO process? Please contact me, Dan Brecher, with any questions.