A private company considering an initial public offering (IPO), should know it is a complex and long process.
A good example is the well-publicized WeWork offering. WeWork attempted to offer its shares to the public through the NASDAQ exchange. However, in light of the many difficulties that arose during the process, the company failed to complete the IPO.
A public offering presents many advantages. Among these are increasing the company’s capital and liquidity, acquiring the ability to raise additional capital, and trading the company’s shares. Others include raising awareness of the company, and improving its image. Along with these advantages, it is important to take into account the many downsides. These include the high cost of the IPO, comprehensive regulation, greater legal exposure in comparison to private companies, introducing “partners” to company profits, limits on executive’s compensation, restrictions on transactions with interested parties, and a loss of exclusive control over the company.
Therefore, before deciding to undertake an initial public offering, there are few points you should consider.
Alternative Means of Fundraising
The purpose of a public offering is generally to raise funds for the company’s activity and growth. However, there are other options for achieving these goals, such as taking out loans or issuing private shares. The common advantage to both these alternatives is that they are possible through a relatively simple and quick process compared to an IPO. Additionally, with the taking out of a loan, the holdings of shareholders are not diluted, and in a private offering, the company may choose the identity of the new shareholders.
Is the Company Attractive Enough for an IPO?
Investors in the capital market usually examine the maturity of the company, its profit potential, the scope of its activity and income, and if it is a burgeoning or established company. They’ll also examine the quality of the company’s product (especially compared to competing products on the market). Finally, investors examine the market’s condition (upward or downward trajectory) and the quality of the company’s management.
A company, and particularly one with complex control structures, may face taxation events because of an IPO. Tax obligations may also result for the company’s shareholders as well as its employees. We recommend you consult with appropriate tax advisors in advance of the process in order to explore the potential tax liabilities.
Underwriters accompany the company in the offering process from start to finish (currently mostly in relation to distribution), and are a pivotal factor in its success. These entities should be familiar with the market and its players (particularly the institutional investors), the prospects of the IPO’s success, how to set prices, and picking a time for the offering. Therefore, it is important to select the right underwriters to support the company throughout the offering process. The significant criteria to consider when selecting an underwriter are its experience in performing offerings, its reputation in the market, its familiarity with institutional bodies, and its ability to distribute the company’s shares in the market.
The points above are only several of the many considerations private companies should examine before undertaking an IPO. There are many other issues to consider, such as what to offer, where to offer, etc.
A deep and thorough examination of the IPO process before hitting the road can significantly help a company in eliminating the many challenges that may arise during the journey.
If you have any queries, please contact Adv. Ron Shuhatovich . Ron is a partner in the capital market department of the firm. He guides companies through various aspects of corporate law and securities law, including IPOs and secondary offerings of securities to the public. He also has rich experience in ongoing consultation on various regulatory issues to Portfolio Asset Management and Trading Platforms.