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Why go public?1.1 Advantages of conducting an IPOJ.P. Morgan (Investment Banking)When considering an IPO, a companyshould evaluate the pros and cons, aswell as the motivations for going public.This evaluation process is best conductedin conjunction with an investment bank,which can assist the company in thinkingthrough the key points. There are numerousadvantages to going public, the mostpertinent of which are detailed in thefollowing section.(a)  Access to capitalGoing public affords a company accessto capital, both at the time of IPO and onan ongoing basis. An IPO can consist ofprimary and/or secondary proceeds. Acompany can raise primary capital to fundgrowth, make investments and/or repaydebt. An IPO can also provide liquidityto existing investors and give them anopportunity to sell stock.Additionally: Once the company is public, it hasaccess to an entirely new, deep andliquid source of capital forany future needs it may have. Being publicly traded adds equity tothe company’s capital-raising toolkit,enabling the company to achieve andmaintain an optimal capital structure andpotentially use stock as an acquisitioncurrency. Following the IPO, the company willbe able to tap the equity markets viafollow-on offerings of primary and/orsecondary shares, or a mix thereof.After the company has been publicfor 12 months, it will be eligible toaccess the equity capital marketsmore efficiently via a shelf registrationstatement.(b) Liquidity eventListing on the NYSE has numerous benefits,not only for the company but also for itsshareholders. As previously mentioned, theIPO can be structured such that existingowners of the company can sell down theirpositions and receive proceeds for theirshares. In addition, once the company ispublic, the existing owners can monetizetheir holdings in an efficient fashion.10NYSE IPO Guide(c)  Branding event and prestigeAn IPO is a significant branding event.By listing on the NYSE, the company willreceive far-reaching media coverage,starting on the first day of trading if notbefore. Subsequent to the IPO, researchanalysts will begin to write reports on thecompany, further raising its profile. This canenhance the company’s visibility, increaseits credibility with existing and potentialcustomers and suppliersand help strengthen its competitiveposition.(d)  Public currency for acquisitionsOnce the company is public, it can use itspublicly tradable common stock in wholeor in part to acquire other companies inconjunction with, or instead of, raisingadditional capital. Publicly tradable stockwith a reference price is more attractiveto target shareholders than illiquid privatecompany stock, which is more difficult tovalue.(e)  Enhanced benefits for currentemployeesStock-based compensation alignsemployees’ interests with those of thecompany and its public shareholders. Byallowing employees to benefit alongsidethe company’s financial success, theseprograms increase productivity andloyalty to the company and serve as a keyselling mechanism when attracting toptalent. Furthermore, issuing equity-basedcompensation will allow the company toattract top talent without incurring additionalcash expenses. Being a public companyprovides employees with the ability tomonetize the value of their stock-basedcompensation, whether it is options orrestricted stock.1.2 Potential issuesJ.P. Morgan (Investment Banking)While there are numerous advantagesto going public, there are also severalconsiderations that the company, itsmanagement and its shareholdersshould evaluate prior to embarking on theIPO process. The most seamless IPOprocesses are for companies that fullyevaluate these considerations beforeembarking on an IPO and begin makingthe necessary preparations months, if notyears, beforehand.(a)  Loss of privacy and flexibilityPrivate companies can operate withoutdisclosing proprietary information in apublic forum. However, to comply withsecurities laws, public companies mustdisclose potentially sensitive informationpublicly, which regulatory agencies, aswell as competitors, can then access. Inaddition, the focus of research analystsand investors on quarterly results andstock price performance may constrainthe operational flexibility that a privatecompany enjoys.(b)  Regulatory requirements andpotential liabilityPublic companies must file various reportswith the SEC and other regulators on anongoing basis. In order to comply withdisclosure requirements, companies oftenneed to change or expand their existingpolicies and infrastructure, which can becostly and time-consuming. In addition,directors and officers are potentiallyliable for misstatements and omissionsin the registration statement and in thecompany’s ongoing reporting under theSecurities Exchange Act of 1934 (theExchange Act).(c)  Sarbanes-OxleyThe Sarbanes-Oxley (SOX) Act waspassed in 2002 following a number ofmajor corporate and accounting scandals,which cost investors billions of dollars andshook public confidence in US securities’controls and disclosure. SOX set newstandards for public companies, includingrequirements relating to accounting,corporate governance, internal controlsand enhanced financial disclosure.Achieving SOX compliance can requiresignificant time, resources and capital.Although the JOBS Act relieves emerginggrowth companies (EGCs) and SEC ruleupdates in 2020 relieve smaller reportingcompanies (SRCs) of the obligation tohave their independent auditors providean attestation on internal controls underSection 404(b), they are still required toput in place internal controls sufficient formanagement to provide the certificationsrequired by Section 404(a).

Why go public?(d)  Cost and distraction ofmanagement time and attentionGoing public is a relatively expensiveendeavor, with one-off and ongoing costsfor legal counsel, accounting and auditingservices, directors and officers (D&O)liability insurance, roadshow expensesand underwriting fees, as well as foradditional personnel to handle expandedreporting, compliance and investor relationsactivities. Furthermore, planning andexecuting an IPO is a time-consumingprocess that can distract managementfrom running the business day-to-day.Ongoing public company obligations shouldalso be expected to take up significantmanagement time.1.3 Going public without an offeringJ.P. Morgan (Investment Banking)Four avenues to go public in the US withouta simultaneous offering are (a) spin-offs/split-offs of existing groups or divisions ofalready public companies, (b) foreign issuerslisting American depositary receipts (ADRs)in the United States, (c) direct listings and(d) special purpose acquisition company(SPAC) mergers.(a)  Spin-offs/split-offsA spin-off or split-off occurs when a publiclylisted company separates a part of itsbusiness into a different publicly listedentity. Typically, that part can function asa separate, stand-alone business, withcharacteristics distinct from those of theparent company. In a spin-off, each existinginvestor in the parent company will receiveshares in the spin-off entity pro rata toits ownership in the parent. For example,Investor A, which owns 5% of ParentCompany A, will receive 5% of the sharesoutstanding in SpinCo A. In this transaction,liquidity is generally preserved for theSpinCo, but the investor churn may beconsiderable. For example, Investor A maybe a logical shareholder of Parent CompanyA, yet dispose of the shares it receives inSpinCo A due to a variety of factors. Thesecan include differences in the businessmodel, growth profile and/or marketcapitalization, among others. To this end, itcan be difficult to control the investor basein a spin-off, whereas during an offeringprocess shares are strategically placedwith those investors known to be interestedin owning them. In a split-off, each existinginvestor in the parent company electsto own either the parent company or theseparated entity post-separation.(b)  Foreign issuers listing ADRsA foreign company that is publicly tradedon an international exchange outside theUnited States can list ADRs on the NYSEwithout conducting an offering. The stockis tied to the underlying internationalsecurity and traditionally trades in tandemwith that security. While the ADR will givethe company incremental exposure toUS investors, there are often limitationson certain funds holding ADRs similar tothose limitations applying to the holdingof international investments, and typicallythe liquidity and trading of ADRs can sufferwhen compared to direct listings of theunderlying stock.Through a US listing, foreign privateissuers (FPIs) can significantly improve theiraccess to the US equity market. Demandfor foreign equities has grown considerablyamong both US institutional and individualinvestors. This demand has been driven bya need for enhanced portfolio diversification,which holdings of foreign equities canprovide, and a desire to tap into the highereconomic growth rates found in manycountries outside the United States—emerging markets, in particular.(c)  Direct listingsIn a direct listing, a company’s outstandingshares are listed on a stock exchange,such as the NYSE, without an underwrittenoffering. In a direct listing, the companydoes not raise capital. Instead, the shares ofexisting stockholders, such as employeesand early-stage investors, are listed on astock exchange, enabling them to freely selltheir shares. Refer to Chapter 5 for additionalinformation on direct listings.(d)  SPAC mergersA company can become publicly listed bymerging with a SPAC. A SPAC is a publiclytraded vehicle that typically has 18 to 24months from its IPO to complete an initialbusiness combination. Securities sold inSPAC IPOs are structured as units, withpublic investors receiving a common shareand a fraction of a (or full) warrant per unit.After the IPO prices, all proceeds are held intrust and accrue interest, only to be releasedupon the consummation of the acquisitionor upon liquidation of the SPAC.After an acquisition has beenannounced, public SPAC investors havetwo key decisions: (1) redeem their sharesfor a pro rata portion of the cash held intrust, or maintain their common stockownership; and (2) vote either for or againstthe acquisition. Investors benefit from bothdownside protection and warrant coverage,which provides additional upside if anacquisition closes and the stock tradesabove the 11.50 strike price. Meanwhile, theSPAC management team, or sponsor, formsthe SPAC and commits at risk capital at thetime of IPO. In return, the SPAC sponsoris entitled to entrepreneurial economics,including common stock most typicallyequating to 20% of the SPAC sharesoutstanding post-offering and sponsorwarrants.Per NYSE rules, the initial businesscombination must represent a fair marketvalue of at least 80% of the cash held intrust. The company a SPAC acquires musteffectively be public market ready, as itbecomes a publicly traded entity as soonas the initial business combination closes.Unlike an IPO where an S-1/F-1 is utilized,the S-4/proxy is the key SEC document.Among other differences, a companyincludes forward looking projections inthe merger document. The S-4/proxy istypically filed shortly after the acquisition isannounced. After a several month reviewperiod with the SEC, dates are set forthe SPAC public shareholders of record,redemption deadline and shareholdervote. The redemption deadline typicallyprecedes the shareholder meeting by twobusiness days, and results are usuallyannounced to the public at or post-closing.The proceeds (minus any redemptions),as well as any incremental capital raisedby the SPAC sponsor, can be used asprimary and/or secondary consideration tothe selling company and its shareholders.Given the proceeds from the SPAC IPO canbe redeemed in full, a SPAC sponsor mayraise committed equity in the form of eithera forward purchase agreement concurrentwith the SPAC IPO or a private investmentin public equity (PIPE) once the target hasbeen identified.NYSE IPO Guide11

2Planning aheadwww.nyse.com/ipo

Planning ahead2 Planning aheadSimpson Thacher & BartlettCompanies may take 6, 12, 18 or even 24or more months to prepare for their initialpublic offerings (IPOs) before formallyengaging underwriters and kicking offthe actual transaction. Companies in theearly planning stages of an IPO frequentlybenefit from taking steps that include thosediscussed here.2.1  Look at your company the wayinvestors willSimpson Thacher & BartlettEvery company that pursues an IPO isgoing to be compared by analysts andinvestors with other companies that arealready public. As a result, it is importantto begin to understand how your companyappears when looked at in this way and,to the maximum extent possible, use thisknowledge to take the steps necessary toensure that your company is positionedcorrectly. What different lines of business is yourcompany involved in? What publicly traded companies are inthese or similar areas? How do the research analysts and theinvestment community value thesepeers? What metrics are used to evaluate thesepeers’ performance? Are there different peer sets (withdiffering approaches to valuation andmultiples) applied to your company’sdifferent business lines?By reading the analyst reports onpotential peers while thinking about thesequestions and even taking the time to meetwith investors and analysts, you can startto understand how your company will beviewed by investors.The next step is to determine whetheryou have the ability today to capture andreport the metrics that the market is used toseeing. For example, are you able to isolateinformation about separate lines of businessthat are valued differently by the market?The answers to such questions will informwhether it makes sense to rework yourinternal and even external financial reportingso as to be able to do this. Effecting thesetypes of changes in reporting can take time.14NYSE IPO GuideHaving accessed the information thatwill allow you to view your own companylike a public market investor, what doesthis data say? For example, if you will wantyour company to be viewed as primarilybelonging with, and valued like, a particularpeer set—is that a true reflection of yourcompany’s business? Everyone involvedshould want the company to be valuedappropriately in its IPO—even without thepotential liability that could arise fromresulting shareholder lawsuits, there isperhaps nothing more painful for a companythat has recently completed an IPO thanbeing revalued downward by the marketin post-IPO trading. Consider whetherthere are acquisitions or new products (or,conversely, dispositions or discontinuances)that are on the whiteboard that may makesense to accelerate during this pretransaction phase in order to bolster theintended investment thesis. As anotherexample, evaluate how your company’sresults, whether in terms of top line growthor margins or otherwise, compare to thepeer set. Do they differ materially and, ifso, why? Are there initiatives that may bedesirable to undertake now to enhance yourcompany’s future relative performance as itwill be measured by the market?Although no one without a deepunderstanding of your business can predictwhat specific insights may be gained fromgoing through the exercise of understandinghow the market values potential peersand then viewing your own companythrough the same lens or lenses, it wouldbe quite surprising if such an exercise failsto uncover areas where an investment ofyour time and attention, and perhaps evendollars, in advance of an IPO would yieldattractive returns.2.2  Prepare to be a public companySimpson Thacher & BartlettRunning a private company with a smallnumber of shareholders or investors canbe very different than operating a publiccompany. Private companies usually lacka public company finance infrastructure,almost certainly will not have an investorrelations capability and may requireadditional resources within their legalfunction. They may also need to expandor reconfigure their management teamto ensure that they have senior officerswith the skill set to interact with a publiccompany board of directors and publiccompany investors.During the pre-transaction preparatoryphase, you should make yourself awareof the public company requirements towhich you will be subjected as part of andfollowing the IPO, and particularly thoserelated to finance and accounting (e.g.,public company accounting, internal auditand financial modeling and forecasting).The next step is to evaluate your internalcapabilities to identify deficiencies. Some ofthe key questions to ask include: Do we currently have a repeatablemonthly and quarterly close process?Do we have the ability to close our booksaccurately each quarter and to reviewand report the results to the public ona timely basis and in accordance withSecurities and Exchange Commission(SEC) guidelines? Do we have a finance departmentwith expertise in SEC accounting andreporting requirements? Many privatecompanies looking to become publiccompanies have inadequate skillsets within their finance departmentsand hire additional internal staff inconnection with going public. Do we have a finance team comfortablepreparing forecasts and projections andable to analyze current period results forreporting purposes? Are our processes and controlsadequately documented and tested?Do we have a plan to comply withSarbanes–Oxley requirements? Does our technology infrastructureadequately support our complianceefforts?Having performed this IPO readinessassessment, create—and then executeon—a realistic work plan that addressesinternal gaps and details necessaryinternal staff hires. It can take manymonths to address areas of deficiencyor weakness, and you should factorin the time and cost of evaluating andimplementing policies, building thenecessary infrastructure and makingcritical hires. Private companies oftenunderestimate the time it takes toget ready to be a public company—atransformation that needs to take placebefore, not after, the IPO.

Planning ahead2.3  Revisit risk with a public companymindsetto addressing these. Indeed, investorsare increasingly focused on how well thecompanies they invest in manage risk.Every company, whether public or private,makes risk management decisions everyday. Whether consciously, such as bydeciding to undertake an enterprise-widerisk assessment exercise, or unconsciously,such as by deciding not to hire an additionalresource in the compliance function. Oneway or the other, your company has decidedwhat balance to strike in terms of acceptingand mitigating risk.Undertaking an IPO alters a company’srisk profile. First, a com

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