Phase 1: Internal Preparation and Due Diligence
The journey to becoming a public company is a marathon, not a sprint. This initial phase, which can take anywhere from six months to two years or more, involves rigorous internal assessment and preparation. It is a period of intense scrutiny where the company must get its house in order.
A critical first step is the internal audit and financial review. The company must ensure its financial statements are in impeccable order, typically requiring a shift to accrual-based accounting if not already in use. Financial records for the past two to three years (often three years of audited financials are required) must be meticulously organized and prepared for examination under the stringent standards of the Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). This process involves evaluating internal controls, accounting policies, and tax compliance. Many companies engage an accounting firm early to conduct a pre-audit to identify and rectify any potential issues well before the formal SEC review.
Concurrently, the company must undertake a comprehensive legal and corporate structuring review. This involves examining all material contracts, intellectual property rights, litigation risks, and regulatory compliance. The corporate governance structure is overhauled to meet public market standards. This includes forming or bolstering key board committees—Audit, Compensation, and Nominating and Governance—comprised of independent directors. The company’s capital structure is analyzed, and any complex equity arrangements, such as multiple classes of stock or convoluted option plans, are simplified or rationalized to be easily understood by public market investors.
A pivotal, yet often underestimated, element is the development of a compelling equity story. This is the narrative that will be presented to investors, explaining why the company is a attractive investment opportunity. It goes beyond financial metrics to articulate the company’s market position, competitive advantages, growth strategy, total addressable market (TAM), and the strength and vision of its management team. This story becomes the foundation for all subsequent marketing materials and roadshow presentations.
Phase 2: Assembling the External Team
An IPO is a complex transaction that requires a team of specialized external experts. The selection of these advisors is one of the most critical decisions a company will make, as their expertise, reputation, and relationships will significantly influence the success of the offering.
The lead role is taken by the investment banks, known as the underwriters. The company selects one or two lead banks (the “bookrunners”) and a syndicate of additional banks. The lead underwriters are responsible for managing the entire process, providing strategic advice, determining the valuation, structuring the deal, underwriting the shares (i.e., buying them from the company and selling them to the public), and building the book of investor demand. Their research analysts will also be crucial in publishing coverage after the mandatory quiet period ends. Companies choose underwriters based on industry expertise, distribution capability, research quality, and prior relationships.
The law firms are equally vital. The company engages its own counsel, specializing in securities law, to guide it through regulatory requirements, prepare corporate governance documents, and handle due diligence. The underwriters also retain their own legal counsel to represent their interests and conduct their independent due diligence. These law firms draft and review the extensive documentation, most notably the S-1 registration statement, and ensure compliance with securities laws.
A certified public accounting (CPA) firm, different from the company’s regular auditor if necessary, is engaged to perform the audit of the financial statements that will be included in the registration statement. This firm provides comfort letters for the underwriters, verifying the accuracy of the financial data disclosed throughout the process.
Other key advisors may include a financial printer experienced in handling sensitive SEC filings, a investor relations (IR) firm to help craft messaging and prepare management for life in the public eye, and a transfer agent to manage shareholder records post-IPO.
Phase 3: SEC Registration and The Roadshow
This is the official, public commencement of the IPO process, governed by the rules of the Securities and Exchange Commission (SEC).
The centerpiece of this phase is the drafting and filing of the Registration Statement, known as the S-1 for most companies. This is a comprehensive document that discloses virtually all material information about the company. It includes audited financial statements, a detailed business description, risk factors, management’s discussion and analysis of financial condition and results of operations (MD&A), information on executives and directors, executive compensation, and the proposed use of proceeds from the offering. The S-1 is a collaborative effort, written by management and the team of lawyers and bankers. Upon initial submission to the SEC, it becomes publicly available and is known as the “red herring” or preliminary prospectus, named for the red disclaimer on its cover stating that the registration is not yet effective.
The SEC then enters a review and comment period. The assigned review team meticulously examines the S-1 and provides a series of comments and questions, often focusing on the clarity of risk factors, the adequacy of financial disclosures, and the justification of accounting methods. The company and its advisors must respond to these comments thoroughly, often leading to several amended S-1 filings (S-1/A). This iterative process continues until the SEC is satisfied that all material information has been adequately disclosed.
While the SEC review is underway, the company and its underwriters begin marketing the offering. This starts with a “testing the waters” period under Regulation FD, allowing company executives to meet with qualified institutional buyers to gauge interest before the roadshow. The formal roadshow occurs after the SEC declares the registration statement “effective.” Management embarks on a grueling one-to-two-week tour, presenting their equity story to institutional investors (e.g., fund managers at Fidelity, BlackRock, T. Rowe Price) in key financial centers. This is a high-stakes sales pitch where management’s ability to articulate the vision and answer tough questions directly influences demand for the stock. Simultaneously, the underwriters’ sales force is “building the book,” taking indications of interest from potential investors to gauge demand and determine the final offer price.
Phase 4: Pricing, Allocation, and Going Public
The final phase is a whirlwind of activity that culminates in the company’s shares trading on a public exchange for the first time.
Based on the investor demand generated during the roadshow, the company and its lead underwriters determine the final offer price and the number of shares to be sold. This typically happens after the market closes on the day before the IPO. The price is set through a delicate balancing act: maximizing capital raised for the company and existing selling shareholders while ensuring a successful debut by leaving some “money on the table” for investors to achieve a first-day “pop.” The underwriters formalize this in the underwriting agreement, where they commit to buying all the shares at the offer price before reselling them to the public.
Following pricing, the underwriters allocate shares to investors in their book. Allocation is strategic; shares are prioritized for long-term anchor investors rather than short-term flippers. The company is then notified of the SEC’s declaration of effectiveness, and the final prospectus is printed and distributed to all purchasers of the stock.
On IPO day, the company’s ticker symbol appears on the chosen exchange (e.g., NYSE or NASDAQ). The opening trade is not immediate; it involves a process where buy and sell orders are collected to establish an opening price through an auction. Once trading begins, the market determines the share price based on supply and demand. The underwriters may engage in market-making activities, such as exercising the over-allotment option (the “greenshoe”), which allows them to issue more shares (usually 15% more) to stabilize the price if trading volatility is high.
Phase 5: Life as a Public Company
The IPO is not the finish line; it is the starting gate for a new chapter with ongoing, stringent obligations. The transition to being a public entity requires a fundamental shift in culture and operations.
The company enters a post-IPO “quiet period” (typically 40 days) where communication is restricted to avoid allegations of hyping the stock. After this, the company must maintain continuous and transparent disclosure through regular filings with the SEC, including annual reports (10-K), quarterly reports (10-Q), and current reports (8-K) for any significant events. It must hold public earnings calls each quarter, openly discussing performance with analysts and investors.
The focus intensifies on quarterly earnings and meeting market expectations. The pressure to deliver consistent growth can be immense. The investor relations team becomes a critical conduit between the company and the investment community. The board of directors, now with a mandate to public shareholders, takes on a heightened role in oversight. The company is subject to greater public scrutiny, media attention, and the constant evaluation of its stock price, making effective corporate governance and strategic execution more important than ever before.
