Before a company may offer its shares for sale, it must first file a registration statement with the Securities and Exchange Commission (SEC). The company must carefully draft this statement because the SEC can refuse or suspend the effectiveness of any registration statement that it deems misleading, inaccurate, or incomplete. This will delay the offering because the company may not sell its shares until the SEC declares a registration statement to be "effective." Accordingly, a company and its underwriters will perform a due diligence review of the company, its business, and its legal affairs to ensure the accuracy of the statement.
Once the company has filed the registration statement, its underwriting syndicate, composed of a group of investment bankers who have agreed to purchase the company's securities and resell them to the public, will distribute the preliminary prospectus to potential buyers. This prospectus is also known as a red herring because it contains the following warning in red on its cover page.
A registration statement relating to 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 the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any State in which such offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of any such State.
The Road Show
Next, the company and its underwriters will prepare for the road show. During this marketing trip, the company's senior management and its underwriters will meet with potential investors to explain the company's business objectives and strategy, and field questions related to the offering.
SEC Approval and Beginning of Sale
Around a month after the company has filed the registration statement, the SEC will return its written comments to the company if the filing appears incomplete or inaccurate. The company may then file correcting or clarifying pre-effective amendments to the registration statement. Sometimes, a company may have to file more than one pre-effective amendment to win SEC approval. When the company has satisfied the disclosure requirements, the SEC will notify the company and the underwriters of its willingness to grant an acceleration request to declare the statement immediately effective. Once the registration statement is effective, the company may begin selling its securities.
Finally, the company and its underwriters will agree on the final price and the number of shares in the IPO. This usually occurs the day before the public offering. The price usually falls within the range set out in the preliminary prospectus. Later, copies of the final prospectus will be sent to all the purchasers of the initial offering. This prospectus will include the final price and the number of shares offered, as well as amendments to the preliminary statement because of SEC suggestions or postfiling events. The offering will close when the money is received and the stock certificates are delivered, which is usually the third day after trading has started.
Speeding the Process
The entire IPO process should run from 2 1/2 to 3 1/2 months. To quicken the pace, a company may take the initiative by providing documents and other information in a timely manner or even drafting a registration statement in advance. With a shorter IPO period, the company reduces the risk that bad news from third parties may upset the market for its shares.
Copyright 1999 Findlaw Inc.