IPO Process (Initial Public Offerings)
One method for a Company to go public is through a registered offering (an initial public offering or “IPO”). A registered offering is where a company files a registration statement with the SEC to sell its securities, either directly or securities already held by selling shareholders. When the registration statement relates to the Company selling securities directly, it is an IPO. When the registration statement relates to the sale of securities already held by shareholders it is called a “secondary offering.” Moreover, when a Company which is already public registers to sell securities directly, this is also called an IPO. While there are many advantages of going public there is also a very strict IPO process.
IPO Process: The SEC
The SEC reviews and sometimes comments on the disclosures. Upon confirmation that the SEC is satisfied that the disclosures meet the requirements of the securities laws, a registration statement goes effective and the securities may be sold.
The SEC does not comment on, nor does it have the authority to judge, the quality of a business or its offering. That is, the SEC cannot deny a Company the right to sell its securities, regardless of whether it thinks it is a good deal or that the Company has value. However, the SEC does comment on, and sometimes extensively, the quality of the disclosures in a registration statement. It is the SEC’s job to make sure that the disclosures meet all the requirements of the securities laws, including, the risks associated with an offering.
IPO Process: Types of Registered Offerings
There are two basic types of registered offerings. First a direct registered offering whereby a company registers its shares for sale to the public (an initial public offering or IPO). The securities can be sold either directly by the Company or through an underwriter (registered broker dealer). The second is through a re-sale registered offering. In a re-sale registered offering a company first sells its securities to shareholder through a private placement and then registers those shareholders’ securities for re-sale to the public. A company can also complete a combination of the two. Moreover, in a registered offering, the Company can register shares of its officers, directors and insiders for re-sale.
Following the effectiveness of a registration statement, a market maker will file a Form 211 with FINRA. Upon satisfaction by FINRA that the disclosures in the Form 211 satisfy SEC Rule 15c2-11, a trading symbol will be assigned and the market maker will be able to begin to quote the securities. Moreover, once the market maker has continuously quoted the Company securities for 30 days, other market makers will be eligible to quote the securities as well without having to file a separate 211 application. This is commonly known as being piggy back qualified.
A Company that completes a registered offering becomes subject to the reporting requirements of the Securities Exchange Act of 1934. That is, the Company must continue to file quarterly reports on Form 10-Q and annual reports on Form 10-K with the SEC. The quarterly reports must contain financial statements which have been reviewed by an independent accountant and the annual report must contain audited financial statements, audited by an independent auditor. In addition, the Company must file periodic reports on Form 8-K upon the happening of certain events and transactions outside the ordinary course of business. Moreover, a reporting company is subject to the proxy rules of the Exchange Act, which governs information provided and solicitation of shareholder votes.
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