Initial Public Offering

An initial public offering, or IPO, generally refers to when a company first sells its shares to the public (SEC, Investor.gov glossary, Initial Public Offering (IPO)). Put the same thing the other way round and it names a change of status rather than a transaction: an IPO is when a private company publicly offers securities for the first time (Cornell Legal Information Institute, Wex, initial public offering (IPO))).

What Changes When a Company Goes Public

Before the offering the company sits outside the disclosure regime. Prior to conducting an IPO, a company is considered private, meaning it does not need to disclose information on its operations but faces restrictions on whom it can sell its securities to, and while private companies may sell securities in private placements, they cannot sell securities on public exchanges, which limits their ability to raise capital. A company sells securities to public investors by conducting an initial public offering, which makes it a public company, and once public the company must file periodic reports with the Securities and Exchange Commission (Cornell Legal Information Institute, Wex, initial public offering (IPO))).

That last sentence is the part with a permanent cost attached. The offering is one event. The reporting obligation it creates is continuous, and the quarterly half of it is set out in Form 10-Q, with the narrative section a registrant has to write beside the numbers in MD&A.

The Registration Requirement

The whole process is shaped by one prohibition. Unless a registration statement is in effect as to a security, it is unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell that security through the use or medium of any prospectus or otherwise, or to carry or cause to be carried through the mails or in interstate commerce any such security for the purpose of sale or for delivery after sale (15 U.S.C. 77e(a)).

A second, separate prohibition reaches offers rather than sales. It is unlawful to use those same means to offer to sell or offer to buy, through the use or medium of any prospectus or otherwise, any security unless a registration statement has been filed as to that security, or while the registration statement is the subject of a refusal order or stop order or, prior to its effective date, any public proceeding or examination under section 77h (15 U.S.C. 77e(c)). Selling and offering are governed by different subsections and by different trigger events, one keyed to a statement being in effect and the other to a statement being filed.

The document that satisfies it is a registration statement. The primary event in an IPO is when the issuer files a Form S-1, which is the most common registration statement used for IPOs, and the registration statement contains the bulk of the quantitative and qualitative disclosures to investors (Cornell Legal Information Institute, Wex, initial public offering (IPO))).

The Three Periods, and Why Communication Is Restricted in Each

Section 5 and SEC rules strictly regulate when and how the issuer can communicate with and act towards investors prior to SEC review, in what is known as gun-jumping (Cornell Legal Information Institute, Wex, initial public offering (IPO))). The timeline splits into three named windows.

The pre-filing period, before the Form S-1 goes in. Section 5(c) prohibits the issuer from making any offer to sell securities, and Section 2(a)(3) defines offer as all communications that may condition the market for the sale of the securities. During this time issuers begin consulting underwriters to market the IPO, law firms to manage the drafting and filing of SEC documents, and accounting firms to audit their financial documents (Cornell Legal Information Institute, Wex, initial public offering (IPO))).

The waiting period, after filing and during SEC review. The issuer and underwriter begin to gauge market interest while the SEC reviews the S-1, and Section 5 allows the issuer to make offers under certain conditions: Section 5(b)(1) allows oral offers, and companies often conduct roadshows during this time, while for essentially all written offers Section 5(b)(1) requires that they satisfy Section 10, which regulates what information prospectuses must contain (Cornell Legal Information Institute, Wex, initial public offering (IPO))).

The post-effective period. Once the SEC approves the issuer’s S-1, the issuer is in the post-effective period and may sell the security without restriction (Cornell Legal Information Institute, Wex, initial public offering (IPO))).

Where the Accounting Work Sits

Audited financial statements are part of what gets filed, and the number of years is a rule rather than a preference. The statutory relief for one class of issuer states the baseline by carving out of it: an emerging growth company need not present more than 2 years of audited financial statements in order for its registration statement with respect to an initial public offering of its common equity securities to be effective, and in any other registration statement filed with the Commission it need not present selected financial data in accordance with section 229.301 of title 17 of the Code of Federal Regulations for any period prior to the earliest audited period presented in connection with its initial public offering (15 U.S.C. 77g(a)(2)(A)).

A second piece of relief runs to accounting standards rather than to years. An emerging growth company may not be required to comply with any new or revised financial accounting standard until such date that a company that is not an issuer, as defined under section 7201 of that title, is required to comply with such new or revised accounting standard, if such standard applies to companies that are not issuers (15 U.S.C. 77g(a)(2)(B)). The consequence is that two newly public companies of similar size can be reporting under different versions of the same standard.

What an audit opinion on those statements actually asserts, and what it does not, is set out in audited report. The framework the statements have to be prepared under is worked through in financial accounting.

Emerging Growth Company, and the Four Ways the Status Ends

The term is defined by revenue at the entry point. An emerging growth company means an issuer that had total annual gross revenues of less than $1,000,000,000, as that amount is indexed for inflation every 5 years by the Commission to reflect the change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, setting the threshold to the nearest 1,000,000, during its most recently completed fiscal year (15 U.S.C. 77b(a)(19)). The dollar figure in the Code is the unindexed one, so the operative threshold in any given year is the Commission’s indexed amount rather than the number the statute prints.

Once the status attaches it runs until the earliest of four events, not the last of them (15 U.S.C. 77b(a)(19)):

• the last day of the fiscal year during which the issuer had total annual gross revenues at or above that indexed threshold;
• the last day of the fiscal year following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective registration statement;
• the date on which the issuer has, during the previous 3-year period, issued more than $1,000,000,000 in non-convertible debt;
• the date on which the issuer is deemed to be a large accelerated filer, as defined in section 240.12b-2 of title 17, Code of Federal Regulations, or any successor thereto (15 U.S.C. 77b(a)(19)(D)).

Because the trigger is the earliest, a company that grows quickly can lose the status long before the five-year clock runs out, and the accounting relief above goes with it.

What an IPO Is Confused With

A Secondary Offering

The word initial is doing work. An IPO is the first public offering by that issuer. A later registered offering by the same, now public, company is not an IPO, and the emerging growth company clock in the section above is keyed to the first sale of common equity securities pursuant to an effective registration statement, which fixes the starting point once.

A Private Placement

A private company is not barred from selling securities before it goes public. Private companies may sell securities in private placements but cannot sell securities on public exchanges, which limits their ability to raise capital (Cornell Legal Information Institute, Wex, initial public offering (IPO))). The private placement raises money without the registration statement, the public exchange, or the periodic reporting that follows an IPO.

Common Questions

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