The IPO Process
IPOs are back in biorefining! Why? Because biorefining presents attractive opportunities in a growth industry. In the past 15 months, initial public offerings have been completed by Amyris, which is modifying microorganisms to produce pharmaceuticals; Gevo, an isobutanol producer; Solazyme, a producer of algae-based oils; and KiOR, which plans to convert nonfood biomass into crude oil. And new offerings are in the pipeline by REG, the nation’s largest biodiesel producer; Genomatica, a biotech manufacturing process developer; and BioAmber, a biobased chemical manufacturer.
Two principal motivations to do an IPO are raising capital and providing a liquid market for stockholders. Collateral benefits include the ready ability to return to the markets for additional equity or debt financing, the opportunity to use publicly traded stock as currency for acquisitions, the availability of tradable stock for employee compensation plans, the perception of stability to lenders and the enhancement of the company’s public image. Disadvantages include the cost of continuing compliance with Securities and Exchange Commission regulations, management time for compliance and attention to markets, and the scrutiny to which public companies are subject.
An IPO must be registered with the SEC, which will review and comment on the disclosure in the prospectus for the offering. This can require several amendments to the registration statement. Exhibits to the registration statement include the company’s governing documents and all agreements that are considered material to the investment decision to be made by investors.
Advance planning is critical. The company needs to be properly structured from a legal standpoint and attractive to public markets. Delaware incorporation is not essential but should be considered. The capital structure should be tailored to present and future needs. Most companies will authorize both common and preferred stock. The governance structure will be revised to provide outside director positions on the board, establish board committees, develop governance procedures and adopt compensation plans and policies to satisfy SEC and stock exchange requirements and meet public market expectations. The markets will also expect management to have the talent required for success. Audits must be available to satisfy the SEC’s financial disclosure requirements. This may require a change in the company’s audit firm and the restatement of previous financial statements. All significant contracts and relationships should be reviewed and, if possible, changed to assure investors that the business is well-managed and stable. Debt financing agreements should be positioned to provide the resources required for the foreseeable future.
Companies commencing an IPO will likely engage an underwriter to sell the offering whose compensation is a commission reflected in a discount from the public offering price. The underwriters will have counsel to assist in diligence review, statement preparation and preparing the underwriting agreement. The company’s counsel will assist in positioning the company for the offering, coordinate delivery of diligence materials to the underwriters, draft the registration statement, supervise filings with the SEC, negotiate the underwriting agreement and complete the closing. The company’s audit firm will review and report on its financial results. Existing stockholders will sometimes offer securities already held by them in tandem with the primary offering by the company. If so, the offering stockholders and their own counsel will also have a role.
Preparing for an IPO can take months, even years. The real kickoff is the selection of the lead underwriter to manage the offering. This will be followed by the underwriters’ diligence investigation. A stockholders’ meeting will likely be required to approve changes to the company’s governance documents. Diligence, final positioning and registration statement preparation can take three months or more. After the registration statement is filed, the primary focus will be responding to SEC comments, but amendments will also update financial statements and reflect changes in the business.
SEC review will normally require at least three months but significant issues can cause the offering to be in registration for considerably longer. During this period, the underwriters conduct a “road show” to introduce the company to potential investors. Contrary to popular wisdom, the SEC does not approve the registration statement or offering. Rather, it indicates that it has no further comments and is willing to allow registration to go effective and the offering to commence. Assuming the company and underwriters agree on the offering price, the underwriting agreement is signed, the offering becomes effective with the SEC, the final prospectus is made available, final commitments by the ultimate purchasers are made, the offering is closed and the company receives the offering proceeds, all within a week.
Author: Dean R. Edstrom
Partner Attorney, Lindquist & Vennum PLLP