Good news for companies that are planning or considering an initial public offering (IPO): The confidential IPO review period, created in 2012 to assist emerging growth companies, is now available to any company considering a public offering, regardless of size. The June decision by the U.S. Securities and Exchange Commission (SEC), effective July 10, 2017, is the first major policy move by new SEC chairman Walter J. Clayton.
Prior to July 10, only smaller companies (defined as those with less than $1.07 billion in annual revenue) were allowed to confidentially file draft registration statements for SEC review before their public offerings. The Jumpstart Our Business Start-Ups (JOBS) Act was created to stimulate the economy by making it easier for these so-called “emerging growth” companies to expand through IPOs. The confidential review period was intended to protect sensitive information required under SEC registration requirements from the competitive threat of premature public scrutiny and to allow companies to consider other exit options at the same time as pursuing an IPO.
There has been some debate as to whether the limited confidentiality period — which expires 15 days prior to the effective date of the public offering — is an effective incentive. Some analysts have also complained that the provision shortens the time they have to perform their own due diligence before a stock hits the market. The SEC, however, says that allowing companies to handle IPO preliminaries in secrecy provides companies more time to plan their offerings and protects them from market fluctuations that can adversely affect companies at a vulnerable time, as well as allows them multiple exit options. The SEC provided these answers for submitting draft registrations under the new rules.
Although the impact of the SEC’s action has yet to be determined, generally speaking, the extension of the confidential review process seems like a great opportunity for companies looking for some kind of exit. As to whether it will succeed in its stated goal, that will depend on a number of factors, including economic conditions, sector timing, industry attractiveness and the individual company’s value proposition.
With all this said, it is also important to note that the extension of confidentially does not change the substance of what pre-public companies have to do to prepare for an IPO. Planning to become a public company is time-consuming and complex, whether done in confidentiality or not. Much of that complexity is due to the numerous legal and technical requirements that must be addressed prior to an IPO. But a substantial — and often overlooked — aspect of public company readiness involves transforming organizational functions and processes.
Protiviti’s Guide to Public Company Transformation, 3rd Edition is an excellent resource for any company that wishes to review the key steps to achieving public company readiness. For starters, our guide recommends that companies establish a baseline of policies and procedures and develop a plan for bringing those critical elements in line with the heightened expectations for a public company. Specifically, our guide recommends that companies:
- Develop a baseline of appropriate accounting, operational and regulatory policies and procedures
- Take stock of the maturity of key processes
- Develop a baseline for the financial close and forecasting capabilities
- Address skills gap and other organizational changes
- Perform a risk assessment and initial scoping for Sarbanes-Oxley readiness and compliance
- Assess the IT environment and consider the specifications of the right ERP system (if required)
- Establish a program management office to address incremental work streams and competing initiatives
This checklist just scratches the surface. For a more substantive analysis download the guide, or register to watch the archived version of our webinar, “It’s What You Don’t Know That Can Affect Your IPO.”
At the end of the day, while this move by the SEC is good news, there’s still a lot of work that companies have to do to prepare for an IPO. The links above should provide a good starting point.