2018 was a strong year for initial public offerings (IPOs), and investors have been looking forward to some high-profile initial public offerings in 2019. Companies are counting on the capital raised from those offerings to achieve critical business objectives, such as expansion — through either internal growth initiatives or acquisitions — or paying down debt incurred in pre-IPO growth initiatives.
Companies considering an IPO are required to submit a prospectus, in advance, to the Securities and Exchange Commission (SEC) for review. The prospectus includes recent financial statement information and other information critical to a prospective investor. The SEC review process, which typically takes anywhere from 60 to 120 days, is a critical step that not only protects investors, but also protects companies from shareholder lawsuits. These filings have a limited “shelf life,” which means they have a “stale date” tied to the availability of recent financial results, after which they must be updated with current financial information.
The recent government shutdown limited SEC reviews of initial filings for more than a month. This clogged the IPO pipeline, causing many companies to delay their initial filings for a later time in 2019 to avoid the time and expense of having to refresh the financial information during the SEC backlog and limited reviews period.
Additionally, other potential SEC registrants have contemplated using a loophole that would allow them to make their offering effective without SEC review. This is a risky step that many in the investment and advisory community have advised against as it raises potential liability for possible errors and omissions in public filings not reviewed by the SEC that could cause a loss for investors.
With the government reopening on January 25 for a period of three weeks, the SEC began reviewing prospectuses again. But with another potential shutdown looming, many companies are holding off their IPOs, waiting for a clear runway. That is likely to make for a busy summer for the SEC as it handles the backlog of delayed filings, and a frustrating process for those companies that are unsure when they will have access to additional capital infusion, or wondering whether they may be needlessly preparing new financial statements.
How to Get and Stay Ready
The entire IPO process, including the preparation of people, processes and technology for life as a public company, typically requires 18 to 24 months. With so much turmoil in the IPO market these days, preparation is key to ensuring companies are ready to take advantage of favorable conditions when they present themselves. If your organization is considering a public offering in 2019, there are some fundamental things you should be doing now to make sure you are ready to strike when the opportunity is optimal:
- Get your finance and accounting processes and documentation in the best possible shape. Worry less about “stale” dates and more about maturing your reporting processes. Mature companies with current accounting systems, mature processes and competent resources should be able to refresh financials within a reasonable time of a period close.
- Study recent IPOs within your peer and industry group, and be aware of recent SEC inquiry trends. Review the questions and responses posted on the SEC website (after your peer becomes “effective” publicly) as well as overall trends, so you can learn from mistakes others have made and close gaps that raise SEC inquiries in the first place.
- If your timeline is a bit longer, take the time that you have to begin acting like a public company before you are one. Assess and upgrade accounting and reporting systems and processes and build your talent pool and process maturity to ensure that you have the bench strength to survive and thrive under public scrutiny.
My colleague Chris Wright has written about this in a recent blog post. In addition, Protiviti publishes a comprehensive guide with questions and answers, updated regularly, to help companies through the transformation required for public company readiness.
Although it is easy to get caught up in the adrenaline of a volatile market and the emotion of governmental agencies starts and stops, a good plan and solid execution beats luck every time. And while it is virtually impossible to guarantee that you’ll be able to time the peak of the market, being ready to go to market at any time is a winning recipe for success.