What is 'Going Public'

Going public is the process of selling shares that were formerly privately held to new investors for the first time. Otherwise known as an initial public offering (IPO).

BREAKING DOWN 'Going Public'

When a company is going public, it is the first time the general public has the ability to buy shares. The process of going public presents unique challenges and is best accomplished with a knowledgeable, experienced team at the helm. An important member of such a team is an experienced securities lawyer. However, every member of the team has important responsibilities in guiding the company through the IPO process.

The Process of Going Public

1. Board approval. Going public starts with a proposal to the company's board of directors by management of the company. The proposal includes details and discussion on the company's past performance, objectives, business plan and financial projections. Management then recommends entrance into the public market. After careful consideration, the board of directors decides whether to move forward.

2. Assemble team. Upon approval, management starts assembling the IPO team, which usually starts with a securities lawyer and an accounting firm.

3. Review and restate financials. After approval, the company's financial statements for the preceding five years are carefully reviewed and, if necessary, restated to comply with Generally Accepted Accounting Principles (GAAP). Certain transactions that are OK for private companies, such as some sale-leaseback arrangements, are then eliminated and financial statements adjusted accordingly. The accounting firm takes the lead in this review and adjustment step.

4. Letter of intent with investment bank. Now is when the company selects an investment bank and issues a letter of intent to formalize the relationship and outline the investment bank's fees, offering size, price ranges and other parameters.

5. Draft prospectus. With a signed letter of intent, the securities lawyers and accountants prepare the prospectus. A prospectus is written to present to investors as both a selling document and as a legal disclosure document. A prospectus requires:

  • A business description
  • Explanation of management structure
  • Disclosure of management compensation
  • Disclosure of transactions between the company and management
  • Names of principal shareholders and their holdings in the company
  • Audited financial statements
  • Discussion on company operations and financial condition
  • Information on the intended use of offering proceeds
  • Discussion on the effect of dilution on existing shares
  • Breakdown of company's dividend policy
  • Description of the company's capitalization;
  • Description of the underwriting agreement.

6. Due diligence. The company's investment bank and accountants will examine the company's management, operations, financial condition, competitive position, performance, and business objectives and plan. They also review the company's labor force, suppliers, customers and industry. Often, the results of the due diligence investigation will necessitate changes to the prospectus.

7. Preliminary prospectus presentation to SEC. A preliminary prospectus must be presented to the SEC and the relevant stock market regulators. State securities commissions may also be required to sign off. The SEC usually comments on the prospectus, normally in the form of requirements for additional disclosure or explanation.

8. Syndication. After the preliminary prospectus has been filed with the SEC, the investment bank should assemble a "syndicate" of other investment banks, which will attempt to sell portions of the offering to investors. Assembly of the syndicate often generates useful information that helps to narrow the share price range.

9. Road show. Company management and the investment banker often perform a series of meetings with potential investors and analysts. This road show is a formal presentation by management on the company's financial condition, operations, performance, markets, and products or services. The potential investors and analysts then ask questions about the company.

10. Prospectus finalization. The prospectus must be revised in accordance with the comments of the SEC. When the SEC declares the registration effective, the company can "go to print" with the prospectus.

11. Determine offering size and price. The day before registration becomes effective and sales begin, the offering is priced. The investment banker will recommend a price for the company's approval, taking into account company performance, pricing of competitive offerings, road show outcomes and general market and industry conditions. The investment banker will also make recommendations on the size of the offering, in consideration of capital required, investor demand and control over the corporation.

12. Print. An experienced financial printer, which has sufficient printing capacity and is familiar with the SEC's regulations regarding the use of graphics, receives the final prospectus for expedited printing.

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  3. SEC Form 424B4

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  6. SEC Form 424B5

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