Key Legal Requirements for Initial Public Offerings (IPOs) (2024)

RESOURCES

• June 20, 2024
• By:Holly

June 20, 2024 | By: Thomas Dunlap

The process of taking a company from privately held to publicly held, or “going public,” is both a significant and complex milestone. There are positive and negative aspects to going through an initial public offering (IPO), which I will highlight in this article. Further, there are very good alternatives to an IPO, many of which can achieve the same goals with significantly less regulatory work, less risk, and at a much lower cost.

Companies take the IPO step to open the door to new growth and expansion opportunities through the additional capital acquired when the company’s shares become available to the general public. An IPO can also provide liquidity to existing shareholders who are seeking a way to monetize the value of their ownership in the company.

However, an IPO is a highly regulated process that comes with a number of risks, including loss of control, public scrutiny, and a slew of regulatory requirements and reporting obligations. Businesses should understand the IPO process and potential hurdles before transitioning to a public company.

Major steps in the IPO process

An IPO involves selling a portion of a company to the public for the first time, thereby raising capital and providing liquidity to existing shareholders. The IPO process typically involves several key stages that require the assistance of multiple professionals, including skilled lawyers, and an investment bank that underwrites the offering and that, along with counsel, acts as the guide for the company.

As mentioned above, the company should start by selecting an investment bank or underwriter to manage the IPO process, underwrite the offering, price the shares, and act as a middleman to the selling of shares and facilitate investor relations.

Next, the company prepares for an IPO by conducting thorough due diligence. In this process, the company must review its financial statements, corporate governance practices, intellectual property portfolio, regulatory compliance issues, and potential legal liabilities.

Then the company must file a registration statement on a Form S-1 with the U.S. Securities and Exchange Commission (SEC) or the relevant regulatory authority in its jurisdiction. In this statement, the company provides a prospectus that discloses offer price methodology, dilution, and detailed information about its business, financials, risks, and corporate governance.

After filing with the SEC, the company conducts a roadshow to market the IPO to potential investors and generate interest in the company stock. The marketing presentation should include an overview of the company’s business model, growth prospects, and investment thesis. The roadshows are usually held in major cities under guidance from the lead investment banker.

Following the roadshow and filing with the SEC, the company will price the shares based on information it has gathered during the book-building process. At this point, the underwriters, in coordination with the company, determine the offering price and allocate shares to institutional and retail investors. Then the company’s shares are listed on a stock exchange, enabling public trading and liquidity for shareholders. There is also often a period where the shares are subject to “conditional trading,” which is a period from a few days to a few weeks where the share purchases have a deferred settlement.

Essential legal requirements for IPOs

Navigating the legal landscape of IPOs requires careful attention to regulatory compliance, disclosure obligations, and investor protection. Companies must fulfill a series of legal requirements, including these:

• Securities laws compliance: Companies must comply with federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934, which govern the offering, registration, and trading of securities.
• Regulatory filings: Companies must prepare and file registration statements, prospectuses, and other offering documents with the SEC or the relevant regulatory authority, providing full and fair disclosure of material information to investors.
• Financial reporting: Companies must adhere to stringent financial reporting requirements, including the preparation of audited financial statements in accordance with Generally Accepted Accounting Principles (GAAP) and timely filing of periodic reports with the SEC.
• Corporate governance: Companies must establish and maintain robust corporate governance practices, including the composition and independence of the board of directors, audit committee oversight, and compliance with stock exchange listing standards.
• Insider trading: Companies and their insiders must comply with insider trading regulations and disclose material nonpublic information promptly to prevent insider trading and ensure fair and orderly markets.
• Antitrust and competition laws: Companies must assess potential antitrust implications of the IPO, particularly if the offering involves a merger or acquisition, and comply with applicable antitrust and competition laws.
• Investor protection: Companies have a duty to protect the interests of investors by providing accurate and complete disclosure of material information, avoiding fraudulent or deceptive practices, and maintaining transparency in their communications.

IPOs depend on experienced legal counsel

Compliance with legal requirements is not just a regulatory obligation; it’s the cornerstone of investor trust, market integrity, and long-term value creation. To leverage the benefits of an IPO, a company must engage in thoughtful planning, strategic decision-making, and strict adherence to legal requirements.

An IPO might not even be the best option when all the factors are considered. Discussing and coordinating the IPO process with an experienced corporate attorney can help.

Alternatives to an IPO

Often, an IPO is only one of many options available to increase the liquidity of insiders and raise additional capital. There are a host of alternatives that Dunlap, Bennett & Ludwig’s lawyers are conversant with, including the following:

1. Private placement, where securities are sold directly to a small group of investors (sometimes institutional investors) without the need for a public offering
2. Direct listing, which allows shareholders to sell shares directly on a stock exchange without the company issuing new shares or raising new capital
3. Venture capital or private equity financing, where the company receives investment from specialized firms in exchange for equity
4. Debt financing, which can provide capital without diluting ownership through issuing bonds or taking loans
5. Strategic partnerships or joint ventures, where the company collaborates with other businesses to access funds and resources while sharing risks and rewards

Our lawyers have access to and contacts for both private equity firms and venture capital firms and can help connect businesses looking to make a move with the right solution. Contact us at 800-747-9354 or clientservices@dbllawyers.com.