IPO When a company decides to go public it is viewed as no longer been owned by a set of private individuals, but instead, it is viewed as now being owned by those individuals as well as by members of the public (or shareholders). This ownership is acquired by shareholders through the purchase of shares in an Initial Public Offering (IPO) or even after an IPO. “An Initial Public Offering (IPO) may be defined as the first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded.” The principal participants in the IPO process are the company’s management, board of directors, counsel, independent accountants, and pre-IPO stockholders; the managing underwriters, research analysts, and underwriters’ counsel; and, of course, the SEC just to name a few. A private company may decide to go public in order to raise additional capital to fund its business and or take advantage of an investment opportunity which will not only benefit the company but also its shareholders. There are many sound reasons for private companies wanting to go public. For instance, equity capital obtained from an IPO is considered a permanent form of capital since there is no interest to be paid on the equity, and it is not repayable like debt. Therefore, funds generated by a public offering are considered a relatively safe form of capital for a business. Going public can also allow a company the freedom and flexibility to spend capital as it needs to finance its growth and further development, providing a solid financial base on which to build. Equity capital from an IPO also allows a company to exploit its market opportunities while they are present before competitors are able to seize them. Like any other venture going public is not without its advantages and disadvantages. A few advantages of going public are: 1) Raising capital – Going public provides opportunity for growth and expansion of a business by offering a wider range of sources to raise capital. A company that complete a traditional IPO will raise a significant amount of capital that it can use in its business operations or for other disclosed purposes. 2) Improved financial status – Going public increases a company’s equity base and creates more leverage for financing growth. It can also improve a company’s debt to equity ratio so that they may be able to borrow additional funds as needed. 3) Higher visibility – The listing of the company’s stock on an exchange or NASDAQ will create an active trading market and provide an avenue to liquidity for current stockholders, who may have been invested in the company for a substantial period of time. An IPO and distribution of shares to a wider, more diverse investor base can create greater public awareness of your products and services. The visibility may give the company a competitive advantage over privately held companies in the same industry 4) Increased employee motivation and retention – A public company can provide an enhanced stock-based compensation strategy for attracting and retaining managers and key employees. A stock-based compensation plan is a way to give employees an opportunity to share in the financial success of the company through an equity compensation component. Companies with a market for their stock have a greater ability to incentivize employees through equity grants. 5) Enhanced wealth and liquidity for the owner – Creation of a public market for a company’s shares increases liquidity, and provides a market guide to calculate the company’s wealth and net worth. Also future access to capital markets will provide a company with name recognition, as well as a readily ascertainable market value for its stock. This will often make it easier to raise additional capital in the future as needs arise.

There are a number of disadvantages why a company may opt not to go public, especially if it has another way to raise capital. With every advantage come disadvantages of a company going public and they include the following: 1) Public company costs – Going public is an expensive process (costs can range from $250,000 to $1 million), and if the offering does not go through, the company will lose that money. Typical expenses associated with a public offering include legal and accounting fees, filing fees, travel costs, printing costs and underwriter's expense allowance. Going public also is an extremely difficult process, especially if the business and its management are not familiar with the registration process. The company will need to put all its business affairs in order and the day-to-day business operations will likely be disrupted. 2) Disclosure obligations – Another disadvantage of going public is that public companies operate under close scrutiny. The prospectus reveals substantial information about the company including transactions with management, executive compensation and prior violations of securities laws. This may be information the company would rather not reveal. In addition, the decision-making process must become more formal and less flexible when there are shareholders. This may be hardest for companies that previously were run by a small number of individuals who made decisions as they wished. 3) Increased risk of legal exposure – There is also an increased risk of exposure to civil liability for public companies, executives and directors for false or misleading statements in the registration statement. In addition, officers may face liability for misrepresentations in reports filed with the SEC, for disclosing false information about the company or for insider trading. Public companies must comply with reporting requirements under the Exchange Act of 1934 as soon as the registration statement becomes effective. Complying with these reporting requirements can be expensive. Before a firm goes public, there are a number of factors which must be considered and steps that must be taken. A private company that wants to go public must consider and understand several key legal requirements and business issues before it begins the process. With careful planning and proper upfront investments of time and resources, a company can tackle these issues in a considered fashion and save itself valuable time and money down the road. A company typically begins the going public process by selecting attorneys, accountants and underwriters with the experience and reputations to effect a successful transaction. The factors that are to be considered and the steps to be taken are varied and many, and to a large extent depends on the size of the firm and the nature of its business. When a firm decides to go public, one of the most important things it first needs to consider is the fact that what it will be doing is “selling itself to the market.” By this I mean it will be selling shares to the market with a view to mainly raising capital for its business, and hence it has to present itself to the public in the most attractive form so that prospective investors will be willing to buy its shares. Most importantly, the company has to get its financial statements which generally need to contain three years of audited financial information and up to five years of unaudited financial data, and the company’s accountants will need to consent to the use of such audited statements in the offering documents so that these statements can form a part of its prospectus. A prospectus is a formal legal document, which is required by and filed with the Securities and Exchange Commission that provides details about an investment offering for sale to the public. A prospectus should contain the facts that an investor needs to make an informed investment decision. From this therefore, you may suggest that the manufacturing company ask itself, Is the company ready? Do they have a clear picture of the formula that the company uses to make money? Can they communicate it? Can the company provide investors with a proven track record? Does the company have a strategic vision and business plan for the future? Can the company demonstrate the strength of its competitive positioning both now and in the future? And finally is the company’s management team ready to commit significant time probably more than anticipated to the process of going public and managing the aftermarket effects? In a document prepared by KPMG on “Going Public”, they suggest that, a company can perform its own assessment of readiness by starting to manage as a public company before they actually go through the offering process from putting appropriate management teams, reporting systems, and governance structure in place, to assessing whether you can live under the constant pressure of meeting investor and regulator demands. This exercise it claims will highlight areas that need attention. If a company prepares early, before it faces undue time pressures from the offering process this will help it be well prepared, reduce its risks, and avoid significant surprises. In addition to checking if the company is ready and doing a thorough review of the company the manufacturing company in question will also be required to decide on a new corporate and management structure; assemble the team that form a part of the public offering process (they include lawyers, underwriters, tax advisors and other key players); develop a timeline and framework for project management; and then develop the offering. A suggested timeline for the public process usually takes about a year to do an IPO from start to finish. Market timing is everything, and if the market is not performing well, the company may want to hold up the process until it recovers. Here is a breakdown of how the process typically unfolds:
|STAGE 1: (Weeks 1 - 8) |
| | Issuer selects counsel. |
| | Issuer organizes financials and other corporate documents. |
| |Lead Manager (Underwriter) and counsel begin due diligence process. |
| |Drafting of Registration Statement begins. |
|STAGE 2: (Weeks 4 - 8) |
| |Co-manager(s) is selected. |
| |Registration Statement completed. |
| |Issuer completes audited financials. |
|STAGE 3: (Weeks 9 - 13) |
| |Registration Statement filed with SEC. |
| |Wait 30 - 40 days for comments from SEC. |
|STAGE 4: (Weeks14 - 16) |
| |Receive comments from SEC. |
| |Amendments to Registration Statement are filed. |
| |Preliminary prospectuses are printed. |
| |Institutional sales executives set up road show meetings. |
| |Road show (2-3 weeks). |
|STAGE 5: (Week 16) |
| |SEC declares Registration Statement effective. |
| |Pricing call day before offering. |
| |Underwriting documents signed. |
| |OFFERING. |
| |Press release issued after offering. |
| |Final prospectuses are printed. |
|STAGE 6: (Week 17) |
| |Closing 3 days past offer. |
| |Closing documents are signed. |
| |Securities are distributed. |

The timeline that you use depends on the size of the firm and may not necessarily have to be spread over one year. Before the IPO Process is complete, it is essential to implement all of the necessary controls, procedures, and systems that will now be required within "public life." Staff changes must be made, new financial systems tested, functions like human resources must be managed, etc. The entire IPO process is much more involved than most people realize. A great IPO team and proper planning is the key to a smooth IPO process. Also before considering an IPO, remember some of the key disadvantages. Once public, your company will be operating in a fish tank, much more visible to outsiders. This will require servicing investors, the SEC, and other interested parties. And don't forget you will have to pay at least $ 500,000 per year in accounting and director liability insurance fees. Going public has got to fit with your strategic plan for growth if you expect the benefits to outweigh the costs. Don't overlook the single biggest source of money, investments made by other companies in emerging, high-growth companies. For many companies, the IPO process is a grueling and wrenching process that fails to meet expectations. Planning well in advance is the key to a successful IPO.

Works Cited

“Initial Public Offerings.”

http://personal.fidelity.com/products/stocksbonds/content/ipoqa.shtml

“Should My Company Go Public”?

http://www.sec.gov/info/smallbus/qasbsec.htm Retrieved June 17, 2012.

“Going public through an IPO.”

http://www.nasdaq.com/markets/ipos. Retrieved June 17, 2012.

“From Private to Publicly Traded Firm.”

http://www.va-interactive.com/inbusiness/editorial/legal/ibt/go

“E InvestmentBank - IPO Timeline.”

http://www.einvestmentbank.com/invest_banking/doc/ipo_timeline.html

“Why Do Company Goes Public.”

http://www.kpmg.com/IssuesAndInsights/ArticlesPublications/Documents/Going%20Public.pdf

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