On behalf of Brewer, Pritchard & Buckley, P.C. on Monday, May 21, 2018.
Filing an initial public offering (IPO) is a big step for a company. For many business owners, it is a goal they have long been working toward with their company. However, becoming publicly traded is not for every business. Below are some things to consider before you and your company start the process of filing an IPO.
If your company wants to list on the New York Stock Exchange (NYSE), the NYSE requires a pretax income of $10 million dollars in the last fiscal year or in the two of the last three previous fiscal years. The NASDAQ Global Select Market requires a pretax income of more than $11 million in the last three years combined or more than $2.2 million in the last two fiscal years.
There are also smaller stock exchange markets to consider. The NYSE’s American Stock Exchange only requires a pretax income of $750,000 from the last fiscal year or two of three latest fiscal years. According to Inc., for large businesses that do not otherwise qualify, the exchanges may also look at alternative standards which could include cash flow, market capitalization, and other revenue.
Needed documentation for prospectus
When you file a public offering, you must create a prospectus. According to Chron, the prospectus needs to include three years of audited financial statements, biographies of company officers and the board of directors, business model information, the plan for IPO profits, and any legal issues your company is facing. The prospectus is filed with the Securities and Exchange Commission (SEC) as a part of the IPO registration statement.
You also want to make sure these documents portray the company’s unique story. Explain what differentiates your brand and highlight any unique selling features. Since these documents are being filed with the SEC, you may consider contacting an attorney to advise you on disclosure requirements and help brainstorm any potential red flags.
More than just showing the company’s financials meet requirements, you want to make sure your company can sustain its revenue. If your revenue stream is still rather unpredictable, it may be too soon to become a publicly traded company. Investors want to buy stock in a company that performs well. Also make sure your business owns something that sets it apart from its competitors, whether that is a brand name, a distinct product, or a specialized service unique to your company. A publicly traded company needs to stand out in the market to remain successful.
Find the right investment banker
It is not unheard of to speak to three to five different banks before you pick the investment banker for your company’s IPO. You will want to make sure the bank’s personality jives with your company, they know and understand the business and industry, the bank has good analyst coverage, and if they have helped previous companies go public.
Put together the road show
Assuming your IPO registration is approved, you then enter the road show phase of the IPO process. The investment banker takes the prospectus on the road to try to enlist potential investors at pre-IPO prices. This helps contribute to the success of the IPO launch.
Launching an IPO is a complex process that exposes your company to intense financial scrutiny. If you feel like your company is ready to go public, you may want to contact an attorney before you start the process. An attorney can help you sort out all the needed paperwork and make sure you are compliant with SEC regulations.