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WHAT S AN PO (NTAL PUBLC

OFFERNG )?
An initial publio offering (lP0) is a private oompany's first offering of its equity to its
investors. lt is the first step that a oompany takes in transforming themselves
from a private firm into a publio firm. 1here are many hurdles to overoome in this
prooess, however the first step whioh is to produoe an lP0 is very well
dooumented and well struotured through the aooounting prooessing that must be
taken.
THE DECSON
1he deoision to go publio is a very important deoision
for a oompany. lt will ohange how
a oompany does business.
1he aotual prooess
of going publio oan be time-oonsuming
and presents oertain unique ohallenges
that a oompany should be prepared
to undertake.
REASONS TO GO PUBLC
hy would any oompany want to go through
this prooess?
1 1o obtain other oompanies with publioly
traded stook as the ourrenoy
2 1o attraot and keep oapable employees
3 1o expand and deorease investor holdings
4 1o provide liquidity and inoentives for
shareholders
5 1o enhanoe the oompany's standing
REASONS WHY A COMPANY SHOULD
THNK THOROUGHLY BEFORE
CONSDERNG PO
isadvantages to 0oing Publio:
-lntense sorutiny from shareholders and the investment oommunity. Management will be under
intense pressure to deliver growth and strong earnings.
-Muoh more disolosure than before. isolosures inolude possible lawsuits, finanoial losses,
oriminal aotions, eto.
-Loss of oontrol - 0noe pubio, the oompany oould be a viotim of a hostile takeover.
-Costs of Publio Company - Publio oompanies have initial and reourring oosts, suoh as annual
audit fees, inoreased payroll oosts for finanoial personnel, publio relations, direotor liability
insuranoe, and other oosts unique to a publio oompany.
-Restriotions on 3took 1rading -lnsiders who hold stook oannot sell the stook after the lP0.
underwriters will also impose oertain look-out provisions, restrioting stook sales.
-1ime - 1he minimum time required for going publio is approximately six months and many
suooessful lP0's (lnitial Publio 0fferings) take over one year. ln oases where the market is
down and the oompany is poorly organized for publio life, the lP0 oan take several years.
MPACT OF SARBANES-OXLEY ACT OF
2002 ON PO
1he oosts of being a publio oompany have almost
doubled as a result of the 3arbanes-0xley Aot of
2002. Additional disolosures, internal oontrols, legal
oounoil, higher audit fees, and other oosts are now
part of how publioly traded oompanies must funotion.
3ome publioly traded oompanies are opting out from
3LC disolosures . 0ther oompanies are going private
through tender offers of their stook, realizing that
running a publio oompany is too oostly.
MPACT OF SARBANES-OXLEY ACT OF
2002 ON PO
WHEN SHOULD A COMPANY CONSDER
PO
A oompany usually begins to think about going publio
when the funding
required to meet the demands of its business begins to
exoeed the
oompany's ability to raise additional oapital through
other ohannels at
attraotive terms. But needing oapital does not always
mean that
going publio is the right, or even possible.
PLANNNG
A suooessful lP0 requires oareful planning.
1his requires two main taotios.
1) A oompany
must prepare its management team and business units to begin aoting like and
funotioning as a publio oompany, both internally and externally.
2) A oompany must identify the key
players in its going-publio team, from the experts it will hire to the staff members who
will help prepare the registration and other sales doouments. 1his is where the
aooounting prooess ooours.
THE ACCOUNTNG PROCESS
1he lP0 transaotion phase takes plaoe right
before the shares are sold and involves attaining
goals that would improve the optimal initial
assessment of the firm.
ACCOUNTNG PROCESSES
inanoial disolosures are a big part of going publio. ou will need a group with baokground in
aooounting to ooordinate 3LC filing and reporting requirements. 1he intent of this aotion
is to prove to potential investors that the oompany is willing to spend a little extra in order to
have the lP0 handled promptly and oorreotly.
inanoial statements must also be audited. 1herefor an aooounting firm with past experienoe with
3LC iling and Reporting Requirements should be hired .
Auditors should :
-offer alternative finanoing plans
-ensure that oontrols and prooedures are well-established.
1his is the foundation for finanoial reporting and disolosure to the 3LC. Retain auditor's early-on
so they oan oomplete internal oontrol reviews and finanoial statement adjustments long
before the oritioal deadlines hit.
TRANSTONNG FROM PRVATELY HELD
TO PUBLCLY HELD
ln order to go publio and do an lP0, oompanies must have the 3LC's approval. 1hey
obtain that approval by writing something oalled an 3-1 dooument. ln most oases
the 3-1 dooument is a full book desoribing exaotly what the oompany is doing and
why? 1his is where an aooountant would oome in. 1he 3LC reads the 3-1
dooument to make neoessary adjustments before either aooepting or rejeoting
the request.
1he next step is to get shareholder approval. 1he oompany is a private oompany prior
to the lP0, and it has private investors.1hose investors have to vote on whether or
not to oreate the lP0, and they use the 3-1 dooument to gather the information
they need to vote. lf the existing shareholders approve the lP0, then the oompany
oan oontinue the prooess.
CONTNUED..
hile filing the 3-1 and getting shareholders
approval, the oompany will ohoose the
exohange to trade on.
Next the oompany makes presentations to large
investors to sell themselves.
1he oompany will not reoeive any oash, all trades
that ooours on the stook market after lP0 is
between investors.
PO PROCESS TMELNE
CO`ClK`S
Market value
1he oompany oan seleot any prioe for its preliminary shares.
lf the oompany ohooses a prioe that is too low, it leaves money on the table. 1he
prioe of the stook will jump up as soon as people start trading it.
Bu1.
if it ohooses a prioe that is too high, the opposite happens. 1he stook prioe falls, and
that oan leave a stain on the oompany's reputation. 1herefore, oompanies and
their bankers spend lots of time oonsidering the lP0 prioe to make sure its at
market value. 1his is done by researoh oompetitors prioes and oonsidering where
the brand stands in the market.
#$
lnvestor Appeal:
ill investors easily understand your business model?
Can investors see long-term value and growth by investing in your
oompany?
o you have positive feedbaok that key people who you know would
be willing to purohase stook in your oompany?
Can you identify groups of people who will have an interest in buying
shares of stook?
..
hat must a oompany do to address these issues?
CHARTS
using oharts when selling investors on why they should invest in your oompany
will give them a olear impression on how the oompany has been progressing.
1his will help them make their deoision with more oertainty.
O.lS .l1lK IlO
-1he goal after the lP0 transaotion phase involves working towards
being able to deliver the promises and business strategies that
the has been sold to investors in the prior stages.
-Companies should not strive to merely meet expeotations that they
had promised, but rather, beat their expeotations.
-Companies that aooomplish not only retain investors but
also build a reputation for themselves whioh leads to more
investors. Larnings will inorease to
finanoe operations and expansion plans whioh will bring the
oompany to suooess in the market.
CREDTS
Pfeuti, Llizabeth. '1he N Manifesto to elp 0et lP0s Baok on 1raok.' 1he lN
Man|fesro ro le|p Cer llUs Baok on 1raok. inanoial News, 1une-1uly 2011. eb.
Nov.-eo. 2011. <http://www.efinanoialnews.oom/story/2011-07-18/the-fn-
manifesto-to-help-get-ipos-baok-on-traok>.
Kurtzman, 0ary 1. 'PRL-lP0 C0MPLN3A1l0N 30Lu1l0N3 R0M RA0R.'llF-llU
0UMlFNS41lUN SUlu1lUNS llUM l4llUll. Radford. eb.
<http://www.radford.oom/home/pre_ipo/>.
'hat Are the 1hree Phases of a Completed lnitial Publio 0ffering (lP0)
1ransformation Prooess?' lnvesropeo|a.oom - Your Souroe lor lnvesr|ng
Fouoar|on. eb. 11 Nov. 2011.
<http://www.investopedia.oom/ask/answers/06/ipoprooess.asp>.

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