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The three steps to going public.

THE THREE STEPS TO GOING PUBLIC

Of two Harvard Business School graduates, one graduated in the top of the class and retired from a lowly position in his company. The second, at the bottom of the class, retired a millionaire. When asked the secret of his success, the latter said: "It's very simple. I buy at $2 and sell at $5. It's amazing how much money I make with a $3 mark-up!"

When a company performs well or has a high likelihood of performing well in the future, the shareholders may be able to enjoy a substantial "mark-up" in the value of their shares through an initial public offering. When successfully completed, the "going public" process not only raises needed capital for the company's growth and operations but allows the company's shares sold to the public to be freely traded.

The three steps to going public are:

Due Diligence and Writing the Registration

The four- to six-month process of going public centers around the preparation of a registration statement to be filed with the Securities and Exchange Commission. The process begins with the critical organizational meeting of the players, including the president and the chief financial officer of the company going public, company legal counsel, the underwriter, underwriter's legal counsel, and the company's auditors. At this organizational meeting, a preliminary time schedule for the entire public-offering process is established and parts are appropriately assigned to each of the players. During this meeting, the players discuss such details as the business of the company, its current financial statements, and management's analysis of the company's financial performance. Company counsel and the underwriter and its counsel carefully plan the investigation or "due diligence" of the company and request any information or documents needed from the company. This due diligence is the foundation upon which all information disclosed to the public is based. The organizational meeting also includes discussion of the publicity policy to be followed prior to and during the public offering and evaluation of any disclosure, accounting, or legal issues expected to arise. Company counsel distributes a detailed questionnaire for the officers and directors of the company to solicit from them information needed for the registration statement.

After the organizational meeting, company counsel and the underwriter pursue the due diligence examination of the company and prepare the first draft of the registration statement for distribution to the working group. The registration statement includes the prospectus which is ultimately to be delivered to interested investors.

Then additional due diligence and working group meetings take place to obtain additional information from management and to revise the registration statement. Underwriter's counsel now delivers the first draft of its complex underwriting agreement. This agreement governs the underwriter's sale to the public of the company's registered shares. The players also begin to plan the "roadshow"--a series of meetings with interested broker groups in cities around the country where management introduces the company to those who will sell the company's shares to the public.

A new draft of the registration statement is then circulated to the players. The board of directors of the company meets to approve the filing of the registration statement with the SEC and to authorize the underwriting agreement and approve other details of the public offering. Once approved by the board of directors, the registration statement is filed with the SEC and the National Association of Securities Dealers (NASD). The underwriter and the company may now elect to print and circulate the preliminary prospectus or red herring contained within the filed registration statement. Distribution of the red herring provides the underwriter with preliminary indications of interest from potential investors. The red herring does not include, however, any pricing information, and it clearly indicates that no sale of the company's shares can be made until the final prospectus is delivered.

Filing with the SEC and Responding to Regulatory Comments

After the registration statement has been filed with the SEC, the company and its underwriter generally begin their roadshow presentation to brokers around the country. During this time, the SEC is evaluating the content of the registration statement and preparing comments for the company. Once comments are received from the SEC, usually within four to six weeks after the initial filing, company counsel makes any necessary adjustments in the registration statement and files an amended registration statement with the SEC for review and acceptance.

Selling the Shares to the Public and Closing the Financing

On the night before the SEC declares the registration statement effective, the company and its underwriter meet to agree on the pricing of the offering. Once the share price is determined, the registration statement is further amended and filed with the SEC and the final prospectuses are printed and distributed to the broker selling syndicate. The sale of the company's shares to the public can now begin. If the offering is a "firm" underwriting, the underwriter purchases the shares from the company on the day sale commences and begins reselling them to the public. Within a few days, the company closes the financing with the underwriter. If the offering is a "best efforts" underwriting, the underwriter uses its best efforts to sell the shares to the public, and the company receives the proceeds in one or a series of closings after the underwriter has sold the requisite number of shares to the public and collected the purchase price.

On the day sales to the public commence, the shares also begin trading on the market. The underwriters and company now learn whether the offering price set for the shares was appropriate by how the market responds. If the shares were priced too low, the price rises quickly. If it was too high, the share price drops. The best result is a slow rise in the share price. Nevertheless, the shareholders of the company learn what kind of a "mark-up" the public is willing to give them for their contribution in building the company. In many cases, the shareholders enjoy a richly rewarding experience.

Robert Rogers is a partner in the corporate and securities law firm of Rogers, Mackey & Price.
COPYRIGHT 1991 Olympus Publishing Co.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:going public with company stocks
Author:Rogers, Robert K.
Publication:Utah Business
Date:Aug 1, 1991
Words:1017
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