The grand IPO rollout: Form S-1 and the transition from private to public

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Apple. Microsoft. IBM. Amazon. The legends of American business are pretty much all publicly traded companies—and at one time, they were all quite small.

The traditional way for companies to get listed and begin trading on a stock exchange is via an initial public offering (IPO), a process that introduces the company, shares its financial information, and invites orders from the investing public. An IPO can help a company attract a wide pool of capital and make a big splash in the market.

It’s not the only way to go public, nor is it the only way for founders to cash out. In addition to IPOs, businesses can go public through a direct listing, merger with a special purpose acquisition company (SPAC), or by selling the business to a public company.

Being publicly traded can be a huge advantage for a company. First, because shares of stock represent a slice of ownership in the company, a public listing makes it easy to change shareholders without affecting day-to-day management. The listing can also raise the company’s visibility in financial media and the marketplace in general.

After the company goes public, it must comply with exchange listing requirements and government regulations, including filing regular financial reports with the Securities and Exchange Commission (SEC). These reports become public information, so anyone can access them. Having the company’s financials—and its market capitalization—on public display at all times can make it easier (and cheaper) for the company to issue bonds and other debt securities.

But it’s typically more expensive to be a publicly held company. When a company prepares for an IPO, executive teams need to budget for the legal, accounting, and public relations services to support it. Remember: It’s a compliance no-no for any company insider to distribute material information in a nonpublic setting.

The IPO process can take as long as a year or more. It starts with the company’s board of directors deciding to go public, then setting up the internal and external teams to manage the process. The firm’s accountants and lawyers have to be involved, along with any venture capital partners and others involved in the pre-IPO funding process, as there are several decisions that need to be hammered out:

Once these and other pre-IPO decisions have been made, the current owners will hire the investment bank that will lead the underwriting process, and later, the transition from private to public. Most companies hire more than one bank, but one has the primary responsibility for getting the deal done.

Once the team is in place, its members work on writing the registration statement, which consists of a prospectus—the “selling document” that’s required by the SEC for any entity offering securities—along with other information required by the SEC to help with the review process.

Although some smaller and emerging companies may opt for a less formal and more streamlined filing process, the standard registration filing is through SEC Form S-1. The S-1 covers every aspect of the company’s business that investors would need to understand to make an investment decision, including:

The SEC reviews the registration documents and either signs off on them or requests revisions. Before the deal closes, the S-1 is considered to be a preliminary document, and it must carry a warning—printed in red—that information is subject to change. Because of the mandatory red warning label, preliminary S-1s are often called red herrings.

When the SEC approves the S-1 for distribution, the investment bank organizes a road show. It usually creates a video presentation that can be viewed by any prospective investor, as well as remarks that the company’s CEO and CFO can give in person. The underwriters organize group meetings in financial centers, as well as one-on-one meetings with interested institutional investors.

Assuming the road show and other pre-IPO buzz have generated significant interest in the company’s shares, the bankers will begin soliciting orders, asking interested investors to indicate how many shares they might be willing to buy and at what price. At this point, the bankers are “putting together a book”—they’re deciding how to structure the IPO share count and offering price to maximize the value of the IPO.

If demand for shares outstrips the company’s interest in selling, the deal is said to be oversubscribed. This is good for the company, because it can then raise more money at a lower cost. Of course, IPOs are often undersubscribed, and sometimes the deal is so undersubscribed that it can’t close at all.

If the IPO does close, the company will issue a final prospectus that includes the number of shares issued, the price of those shares, and total amount of money raised.

Because an IPO is expensive, a lot of work, and not guaranteed to raise money, many companies that want to go public look for alternatives. These include:

No matter how a company goes public, it’s responsible for complying with all listing and reporting requirements.

Going public is a long process, but with a potentially big payoff in terms of capital infusion, attention from stock analysts and financial media outlets, and—as the company grows—perhaps inclusion in one or more stock indexes.

But as glamorous as a stock exchange listing may be, it comes with compliance and reporting requirements that not all companies are prepared to meet. For those that can do the work, it can turn a business into a household name, and perhaps even a legend.