In the context of a global economic slowdown, heightened market volatility, geopolitical changes, and adjustments in monetary policy, the global initial public offering (IPO) market in Q3 2024 warrants a sense of cautious optimism. This Insight highlights key takeaways to consider before launching a public venture.
The Pros and Cons of an IPO Process
- IPOs provide greater access to capital and a broader investor base but come with increased reporting obligations and public scrutiny.
- Going public can offer liquidity for shareholders, potential stock price appreciation, and easier acquisition opportunities.
- IPOs are expensive and time-consuming, with potential stock price manipulation and loss of control. Increased litigation risk and regulatory liability are also cons.
Preparing for the IPO
- Preparing for an IPO involves ensuring accounting compliance, gathering diligence materials, and substantiating information in the registration statement.
- Pre-IPO companies need to ensure Sarbanes-Oxley Act compliance, including having an independent Public Company Accounting Oversight Board (PCAOB) registered auditor.
- Companies must review corporate records and minutes for proper recordkeeping and potential shareholder plaintiff claims.
- Pre-IPO companies should assess the breadth and depth of their management team to meet new demands.
- A pre-IPO company will need to evaluate their current board of directors and consider the need to recruit qualified independent directors.
- Pre-IPO companies should consider and determine the exchange on which the company’s securities will be listed and the related corporate governance requirements of such exchange.
IPO Structure and Considerations
- The structure of the IPO is important, including offering size and primary vs secondary IPOs.
- Determine whether to have a dual class of common stock and what to do with the proceeds.
- Discuss and consider tax implications.
Choosing IPO Underwriters
- Consider the underwriter’s knowledge or, and expertise in, the company’s industry, which should include a review of the underwriter’s recent transactions and aftermarket performance.
- Consider the underwriter’s resource commitment (during and after the transaction) and research positioning in the company’s industry.
- Discuss the underwriter’s views on valuation, structure, and timing, as well as the recommended selling strategy.
- Consider the underwriter compensation terms.
Corporate Governance Considerations
- Determine the composition of a post-IPO board of directors, taking into consideration independence standards, board committee requirements, diversity considerations, and requisite director skills, and develop a non-employee director compensation program.
- Review and update company charter and bylaws, including with respect to capital structure, shareholder rights, and indemnification provisions.
- Review and potentially restructure corporate subsidiaries for a clean and tax-efficient corporate structure.
- Prepare corporate governance documents and policies, including committee charters, corporate governance guidelines, code of conduct, code of ethics, insider trading policy, Regulation FD policy, related party transaction policy, and clawback policy.
Disclosure Requirements and Legal Considerations
- If possible, resolve any outstanding legal claims.
- Consider any requisite third-party consents.
- Review and inventory company intellectual property (IP) and confirm that there are no IP issues.
- Review D&Q questionnaires to confirm no issues raised by director and officer responses.
- Review management compensation arrangements, with a view towards the required disclosure of named executive officer compensation.
- Thoroughly review cap table, consider lock-up periods, and ensure compliance with Rule 701 for equity grants.
- Consider “gun jumping” issues.