Initial Public Offering
Best Practice Summary

An initial public offering (IPO) is made when a company, for the first time, offers a certain amount of securities to the general public. In order to "go public", the company must file a Registration Statement with the Securities and Exchange Commission (SEC). The Registration Form S-1, which is used for the largest U.S. companies, contains: (a) a prospectus to be distributed to the public that discloses specific information required by the applicable SEC regulations, which include risk factors, management, description of capital stock, dividend policy, capitalization, selected financial data, principal stockholders, business information, shares eligible for future sale, underwriters, legal matters, contacts for investors to obtain additional information, and (b) certain other documents, agreements and information that may be required by the SEC but are not required in the prospectus itself.


Major advantages of "going public" are that it provides:

  • An infusion of capital for corporate growth
  • Liquidity for existing stockholders
  • Easier recruiting of employees
  • Power and prestige

Disadvantages concern:

  • Extremely expensive process
  • Drains financial and personnel resources
  • Burdensome SEC regulations and reporting requirements under the Securities Exchange Act of 1934
  • Loss of control
  • Change of procedures from private to public company
  • Potential threat of takeover

The IPO process is time-consuming and resource-draining process taking 12-14 weeks to complete. The general process is to:

Extensive Due Diligence

Due diligence is a major part of the IPO process and often times is where the deal dies. Since the process is lengthy it is important to keep good tracking mechanisms in place to assure that records have been checked and provided to underwriter when necessary. LeapLaw's due diligence checklist is a typical list of documents that are reviewed in the due diligence phase.

Obtain an Underwriter

The underwriter is the investment bank that assumes the risk of bringing a company through an initial public offering by purchasing (at a discounted rate) a certain amount of company (issuer) stock for the purpose of offering or selling the stock in the public market. The underwriter buys the securities from the Issuer and guarantees the sale of a certain number of shares to investors.

The primary underwriter is called the Lead Manager, others may be referred to as the co-manager. A group of underwriters who have agreed to purchase stock in the offering are called a "syndicate".

Blue Sky Analysis and Filings

Blue sky laws are state securities laws (preempted in certain respects by NSMIA) that require Issuers of new securities (i.e. stock, warrants, options and/or debt) to register securities offerings and provide certain financial details so that investors can make judgments based on trustworthy data. Blue sky analysis is complex. State laws where each sale is being made must be analyzed carefully to determine if a blue sky filing is necessary. LeapLaw's Blue Sky Best Practice Summary provides additional information about the state securities laws and the process of blue sky filings.

Obtain and Arrange for a Financial Printer

Financial printers are printers that specialize in financial printing and filing of annual reports and preparation and filing Forms such as the initial Registration Statement with the SEC via EDGAR.

Order EDGAR Filing Codes

Pursuant to SEC Regulation S-T, EDGAR (Electronic Data Gathering, Analysis and Retrieval) is the system used by the SEC to automate, index, validate and accept filings made by public companies in this instance, Form S-1. First time EDGAR filers must obtain a:

  • Central Index Key ("CIK") number which is the public code that identifies each individual filer.

  • CIK Confirmation Code ("CCC") which is a confidential personal identification code for each registrant.

  • Passwords expire annually and are issued as a confidential code and used to modify the company's CCC if necessary.

  • Password Modification Access Code ("PMAC") is used when the company's password must be modified.

Codes are obtained online by filing a Form ID with the SEC Filer Support Unit.

SEC Filer Support Unit
(202) 504-2474
Contact number is (202) 942-8900

Draft and File Registration Statement
The Prospectus or Red Herring

A prospectus is a written offer for sales of securities. It is a disclosure and marketing document that is distributed to prospective investors, including information about the business and its stock to both comply with securities regulations and attract buyers.

At the beginning of the initial public offering process, a Registration Statement is filed via EDGAR with the SEC together with a draft of the prospectus known as the preliminary prospectus. Prior to effectiveness, the preliminary prospectus is used as a marketing tool. It contains a bright red disclaimer (or legend) warning potential investors that the contents are subject to amendment and that the registration statement has not yet become effective. Accordingly it is referred to colloquially as a “Red Herring” or “red”. The “Red Herring” legend is required to be similar to the following:

"A registration statement relating to the these securities has been filed with the Securities and Exchange Commission but has not become effective. Information contained herein is subject to completion or amendment. These securities may not be sold nor may offers to buy be accepted prior to the time registration becomes effective.”

A prospectus contains the following information prescribed by Regulation S-K:
  • Status, Effective Date or Disclaimer
  • Issuer’s Name
  • Type of securities being offered
  • A statement as to whether there is or is not a public market
  • Underwriter’s information
  • Summary of information
  • Risk factors
  • Litigation
  • History of the business, operations, locations and general business plan
  • Use of proceeds section explaining how investment capital will be used
  • Dilution section comparing price per share paid by existing stockholders to be the current offering price
  • Dividend policy
  • Consolidated financial statements
  • Management discussion and disclosure; and analysis of financial information
  • Competition
  • Intellectual Property
  • Underwriting section discloses among other things, the underwriter’s compensation
  • Legal matters
  • Report of independent accountants.

The preliminary prospectus must be mailed to potential investors at least 48 hours prior to the “sale” pursuant to Securities Exchange Act of 1934, Rule 15c2-8 (pdf). Information contained in the final prospectus must be kept current and provide accurate information at all times and may be modified and supplemented when necessary. Modified prospectuses must be filed with the SEC.

The Securities Act Reform adopted June 30, 2005 revises the prospectus delivery requirements so that "access equals delivery". This essentially eliminates the need for the final prospectus to be physically delivered. The new rule will become effective 30 days following the publication of the Federal Register notice.

Samples prospectuses may be found at the SEC or EDGAR Online.

Road Show

Following the distribution of the preliminary prospectus or "Red Herring" during a public offering, the underwriters generally sponsor a "road show" in which they and certain company executives attend a series of meetings in various cities to make a marketing pitch to potential investors.

The Securities Act Reform addresses treatment of electronic communications, including electronic road shows and information located on or hyperlinked to an issuer's web site. Electronic road shows excludes communications that are carried live or in real-time to a live audience, regardless of the means of transmission. In order to avoid filing the electronic road show with the SEC, IPOs of common equity or convertible equity securities must make a bona fide electronic road show readily available to an unrestricted audience.

Obtain a Ticker Symbol

Ticker symbols are the one to five letter abbreviations representing a company's name on a ticker, a TV screen or newspaper. The symbol should be representative of the company's name. For instance, if the company's name was Walt Disney, then the possible combination would be anything beginning with W or D or has a W or D in the ticker symbol. NYSE companies' ticker symbols consist of one to three letters. The American Stock Exchange generally uses 2-3 letter ticker symbols, while companies listed on NASDAQ have symbols consisting of four to five letters. LeapLaw's Ticker Symbol Best Practice Summary contains instructions on obtaining ticker symbols for each exchange and NASDAQ.

Order CUSIP Number

CUSIP stands for Committee on Uniform Security Identification Procedures. CUSIP numbers are 9-digit numbers assigned by Standard & Poor's Corporation that uniquely identifies Issuers of securities and their financial institutions and are recognized worldwide by organizations adhering to standards issued by the International Securities Organization (ISO). A draft copy of the document prompting the application for a CUSIP number (i.e. preliminary prospectus or Form S-1) needs to be included with the request. CUSIP numbers may be requested via mail, online or by fax. If requesting in writing, the request letter must include a name and address of the person who is to receive the bill for the assignment fee. There is a $100 fee for the first CUSIP number and a $7.00 fee for each additional CUSIP number issued for different classes of stock (i.e. Class B Common Stock and Class A Common Stock) of a single Issuer. A final copy of the document needs to be sent to CUSIP as soon as it is available.

Obtain and Arrange for a Transfer Agent

Typically contracted for public companies, a transfer agent is typically a bank or trust company appointed by a vote of directors to keep the stock records of the company, issue stock and coordinate transfer of stock, options, warrants and other securities on behalf of the corporation. Transfer agents may also be used as proxy solicitors or Inspector of Elections at stockholder (special or annual) meetings. Popular transfer agents are:

Boston Equiserve
(800) 730-6001

Institutional Shareholder Services
(301) 545-4107

Listing with NASDAQ (or other exchange)

Listing on a public market is a separate process usually done in conjunction with an initial public offering. A public company does not have to be a listed company on publicly-traded market such as American Stock Exchange (AMEX), New York Stock Exchange (NYSE), National Association of Securities Dealers Automated Quotation (NASDAQ). Most companies, however, do choose to list on an exchange or on NASDAQ. Most common reasons a company may choose not to be listed on an exchange or in NASDAQ are:

1) The company does not meet listing criteria such as:

  • Insufficient number of shares publicly-traded
  • Total market value of traded shares
  • Market capitalization
  • Asset base

2) The company does not want to incur the costs of listing which are:

  • Substantial expenses and fees
  • Increased exposure to public scrutiny
  • Likelihood of outside interference increases
  • Obligations under Securities Act of 1934 which require all listed companies to register and report to the SEC even if no public offering is being made

Public companies not listed on the major exchanges or on NASDAQ may be listed on the Over The Counter Bulletin Board (OTCBB) which delivers electronic quotation services for Over-The-Counter (OTC) equity securities including those companies that are not publicly-traded or fully reporting companies with the SEC.

General IPO Matters

Material Nonpublic Information

Information is generally considered to be nonpublic if it has not been made available to investors or to the public. Information is material if such information would likely influence a reasonable investor into making an investment decision such investing in an initial public offering.

The Securities Act of 1933 (pdf) prohibits the "publication of information, statements and publicity efforts made in advance of a proposed financing that has the effect of conditioning the public mind or arousing public interest in the Issuer or its securities. This prohibition includes content on the company's web site. Therefore, during and shortly after an IPO the public company must carefully limit press releases and all other publications or media publicity so that prospective investors will rely solely on information contained in the prospectus.

Insider Trading

Rule 10b-5 (pdf) of the Securities Exchange Act of 1934 prohibits any corporate insider from engaging in buying or selling securities while they have access to material nonpublic information. The term "Insider" includes any person with a special relationship with the company who would or could provide such a person with material non-public information. Insiders are forbidden from using such information for their own use and/or passing such information to an outsider.

Public companies must disclose certain material information to the public as required by federal securities laws. There are certain times when company insiders (defined by Rule 10b-5 of the Securities Exchange Act of 1934) are privy to certain material information that has not yet been released and absorbed by the public.

A public company requires adequate time to release and disseminate such information and therefore the company imposes trading restrictions on its stock for a certain amount of time during an initial public offering or before and after a merger or acquisition, fiscal year end changes and changes in plan administrators of stock option plans, after an earnings announcement and before and after a major company announcement.

Higher level employees obviously have greater access to material information, therefore it is common for a company to impose different levels of trading restrictions on different levels of employees. Blackout periods for stock options plans are contained in the Stock Option Plan.

All persons considered to be insiders as defined by Rule 10b-5 of the Act are subject to the blackout period for trading the company's stock.

Lock Up Agreement

In the course of a public offering, a corporation, its officers, directors and major stockholders are typically required by the underwriter to enter into a lock-up agreement whereby each party agrees not to sell any securities of the corporation for a specified period of time (typically 180 days) following the date of the final prospectus. The shares restricted by this agreement are referred to as being "locked up".

Legal Opinions and Back Up

Comfort letters are issued by Independent Accountants during the Initial Public Offering process and assure:

(a) independence of accountants from the Issuer
(b) compliance with audited financial statements
(c) negative assurances relating to unaudited comparative stub period financial statements included in the Registration Statement.
(d) changes (or lack of) in key accounts for certain periods since the latest financial statements contained in the Form S-1.

An underwriter is likely to request a comfort letter from the accountants of the company stating that no material adverse changes have occurred in the company's financial condition.

A back up book is a binder containing all of the "back-up" information to representations made by the company in its prospectus.

On-Going Reporting Requirements

Once a company is public it must maintain and uphold certain standards that concern the number of stockholders and market capitalization. Following the initial registration, a company may file other registration statements such as:

  • Form S-3 to register additional shares at least 12 months following the initial public offering.
  • Form S-4 to register securities issuable in connection with a business combination, such as a merger.
  • Form S-8 to register securities issuable under a stock option plan.

If the company is also publicly-traded, it must meet reporting requirements of the Securities Exchange Act of 1934(pdf).

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