Going Public – Getting Your House In Order

A successful initial public offering requires thoughtful planning and detailed preparation well in advance of the SEC filing. In some cases this can take over a year. Here are some factors a company and its advisors should consider and address prior to determining to proceed with a public offering.


A. Analysis of Historical Performance and MD&A

  • The SEC typically requires three years of audited income statements and two years of audited balance sheets be included in the registration statement.
  • Small business issuer offerings require two years of audited income statements and one year of audited balance sheets.
  • MD&A analysis of changes in financial information, liquidity, capital resources, seasonality of business is required.

B. The Use of Projections

  • Any assumptions you make will undergo intense scrutiny. Preparation, honesty, and attention to detail, are paramount. This is typically the starting point for underwriter due diligence.
  • Valuation- For many issuers projections are the principle variable use by underwriters to develop the red herring (preliminary prospectus) offering range (range of stock price expected to be published in the prospectus and utilized in the road show).
  • The Two Faces of Projections. Projections prepared by insiders and company management are typically developed to justify a fully valued offering. They, however, continue with the company as a measuring rod for expected future performance.

C. Offering Parameters During the process of preparing for a public offering.

  • Management will need to develop certain parameters for the Offering as well as certain company objectives after the offering.
  • A public offering is a selling effort as it relates to the company and its management, its need for capital, and its ability to take the proceeds, invest them wisely, perform and build value.
  • The need to build a compelling business plan.
  • The need to develop competitive strength- market position, a niche and strategy.
  • The need to develop and be prepared to execute a growth strategy.
  • Is breath of management deep enough. Can existing management implement the growth strategy.
  • Will the funds be sufficient to carry out the plan?
  • Specifically how are the proceeds of the offering going to be used?
  • What percentage of the company are the insiders wiling to sell and how much control will they be relinquishing?
  • What incentive plans are needed for management (ie. salary, bonus, restricted stock, stock options, employee benefits, etc.)?
  • What level of insider selling will be allowed, how much, how often?

D. The Management Team

  • This is typically the most important element of the business plan. The human talent that will implement the plan.
  • Issue of one man band- is there depth in key areas?
  • Is the current infrastructure adequate to handle the new financial controls. Quarterly Reporting, record keeping, compliance and public relations that will be required as a public company?
  • There will be disclosure checks and background checks.

E. The Right Advisors

  • Often there is a need to move on to a new level of experience and sophistication.
  • Attorneys, auditors/accountants, public/investor relations firms should have solid public offering, SEC and public company experience. The right advisors will assist in assessing risks, identifying and resolving problems and with timing, efficiency, and the success of an offering.


A. Financial Reports & Controls

  • The SEC is going to require three years of audited income and two years of audited balance sheets to be included in the registration; one year less for small business issuers. Underwriters may impose even more stringent standards such as having the most recent quarter audited or that audits be performed by a Big 6″ accounting firm.
  • Underwriters will also want to ensure the companys financial controls and personnel are adequate to assure the integrity of its financial statements.
  • Selection of an auditor is important.

a. Should be well known to bring credibility to the prospectus.

b. Should have in-depth SEC knowledge and expertise.

c. Timing is important. The earlier the auditor is brought on board the better.

d. You want an auditor who can grow wit the company and accommodate future needs.

B. Organizational Structure

·        Keep it simple, understandable and fee of conflict and question.

·        Red Flags Go Up- Brother/sister corporations, trusts/partnerships, partially-owned subsidiaries, insider/conflict of interest transactions (leases with shareholders, excessive salaries or other benefits, loans, guarantees, shareholder agreements).

·        Correct them now. Through mergers, dispositions, liquidations, capital contributions. Through repayment of insider loans, termination of agreements, amendments to making arms length transactions.

CCapital Structure

  • There is a need to achieve the appropriate per share price for the offering. Adjust the number of shares through stock split or reverse split.

a. The Red Herring price should be in an appropriate range.

b. Avoid the appearance of a penny stock.

c. Avoid making a round lot too expensive.

  • Have available a sufficient number of shares for adequate float.
  • Deal with any outstanding convertible securities (preferred stock or debt) through automatic conversion, redemption, negotiation).
  • Deal with all outstanding registration rights.
  • Rule l44- Pre-offering shareholders agree to sign lock-up agreements restricting their ability to sell shares for a period of time.

D. Charter & Bylaw Amendments

  • Revise your agreements to achieve the flexibility you will need.
  • Eliminate any unnecessary/inappropriate provisions.

a. Outdated provisions.

b. Elaborate statements of purpose.

c. Close corporation provisions.

d. Preemptive rights, cumulative voting, rights of first refusal, special voting provisions, buy-sell provisions, etc.

  • Increase the Number of Authorized Shares

a. Authorize the appropriate number of shares to effect offering and to provide for future stock issuances (options, offerings, etc.). Its much easier to do as a private rather than public company.

b. Consider authorizing Blank Check preferred. Terms and issuance are left to the Board for future financings, acquisitions, etc.

  • Consider special and anti-takeover provisions

a. Shark repellants are common. Carefully work any provision with the Underwriter to determine the markets appetite for and effect. Much easier to do now than when public. b. Use of special charter and by-law provisions that call for fair price, business combination provisions, limitation on shareholder ability to call special meetings or act by written consent, special record date, may make hostile attempts to gain corporate control more difficult, time consuming and expensive.

E. Board of Directors & Management

  • Independent Directors-The Board should include several truly independent, yet highly capable non-management directors.
  • Once the company is public there will be a need for audit and compensation committees; perhaps executive and nominating committees.
  • Strong, Credentialed Management. Every business unit or major function should be managed and supervised by qualified personnel. There should be a good balance between financial, marketing, management, and technical personnel.
  • There is no room for skeletons in the closet. Management should have strong, disclosable background.
  • Attention needs top be paid to managements ability to handle the pressures, Quarterly Reporting requirements, controls, disclosures, insider and information trading, and quarterly orientation and responsibilities associated with being a public company.
  • Give thought to employment agreements. May be wise to enter into, revise or terminate employment and consulting agreements, confidentiality and non- compete agreements.
  • Closely examine the litigation risks associated with being public. These matters should be addressed in charter documents, by-laws and special agreements. Appropriate levels of D&O insurance should be carried.

F. Employees and Employee Benefit Plans

  • One of the key benefits of being public is the ability to compensate employees with stock and stock-related plans and benefits. There are securities laws and requirements involved in providing these benefits including:

a. Section l6 (B) of the Securities Exchange Act requiring disgorgement of any profit realized by an officer, director or l0% or greater shareholder in connection with a purchase and sale, or sale and purchase, within any six- month period. This is a regulation undergoing regular revisions.

  • Employee Education is important. Employees will have to educated as to their new responsibilities under the securities laws. Non-compliance can result in criminal and civil sanctions as well as irrefutable damage to the company and its shareholders.
  • Management and directors should be kept abreast of any state duty and liability issues.
  • The Board should adopt confidentiality and insider trading policies and ensure uniform compliance with such policies.

G. Stock Issues

  • New Stock Certificates (logo, design, state law requirements, exchange requirements, CUSIP numbers).
  • A Transfer Agent and Registrar need to be selected.
  • Appropriate By-law provisions need to be adopted.

HTax Issues

The company must deal with and clean up any disclosure and auditing concerns prior to filing the registration. These can include state and federal income, state sales returns that were not filed; accounting treatments that are may not be appropriate.

I. Litigation

It is best to settle and eliminate any claims and litigation prior to the first filing. This will avoid disclosure and negative issues that might otherwise arise. Settlements can be structured as to include funds that may come out of offering proceeds.

J. Pre-Filing Announcements and Publicity

  • Any statements made or by Quarterly Report to be made, in advance of the public offering, may be deemed to be or a part of the public offering of securities. They are subject to strict regulatory prescriptions.
  • Quiet Period, Prospectus and Gun-Jumping issues will require careful planning.
  • The company should carefully scrutinize any product and other announcements as well as press interviews.


M & A Resource Library    Obtaining Finance

Grimes, McGovern & Associates provides expert advice during all phases of a transaction. Contact us today for a confidential consultation: John McGovern, CEO, [email protected], (917) 881-6563 or Julie Bergman, VP, Newspaper Division, [email protected], (218) 230-8943.

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