By Jason Bishara
A company doesn’t go public overnight. The IPO process takes time – several months at a minimum, according to the SEC. During this time, the company examines its accounting controls and recordkeeping systems, while also preparing to meet various reporting, disclosure and compliance requirements.
Once a company decides to go public, the founders may be very excited to proceed. However, it’s important to do things right. In addition to meeting SEC reporting and financial requirements, companies also have to consider investor outreach, stock exchange listings and D&O insurance coverage, among other considerations, all while running the company efficiently.
It’s a lot to juggle, and companies that try to move too quickly could make critical missteps as a result. In light of the risks, cautious founders may want to move slowly – but that can create even more concerns.
Why Slower May Be Riskier
A long pre-IPO timeline gives you room to dot your i’s and cross your t’s, but it also creates more time for things to go wrong. In fact, a long timeline could increase your overall exposure.
Here’s why:
There are more statements to scrutinize. If the company’s value drops after the IPO, any statements made in the lead-up to the IPO may come under scrutiny as investors determine whether they were misled and whether they have grounds for a shareholder lawsuit. This can include formal statements as well as more casual remarks, such as comments that company leaders post on social media. The longer your timeline, the more opportunities there are for statements that could be interpreted as misleading.
There’s a greater chance of unforeseen market disruption. When you start the IPO process, you hope that market conditions will stay favorable, but there’s no guarantee that this will happen. With a longer timeline, there’s a greater chance of recessions, tariffs, wars, pandemics, and other outside factors that could impact your company’s outlook. Of course, unexpected disruption is possible even with a shorter timeline, but the odds of something happening increase as your IPO drags on. Disruption could negatively affect your company’s value, leading to increased scrutiny. In a worst-case scenario, it could even lead to failure-to-launch claims.
New rules and regulations could apply. Political upheaval, rule changes, and evolving enforcement activity can have a significant impact on your company’s IPO. Take Nasdaq’s recent changes to its initial listing standards as an example. Companies now need a Market Value of Unrestricted Publicly Held Shares of at least $15 million, and they’re subject to increased discretionary requirements. If your company was counting on a Nasdaq listing and you can’t meet the new requirements, you could end up in a difficult position.
Overall costs can increase. Going public is expensive. While some costs may be fixed regardless of the IPO timeline, other costs will likely increase with a longer process. For example, if you need additional legal counsel for a longer timeline, expect to pay more. The extra costs can put additional pressure on companies, particularly microcaps, possibly leading to financial strain.
Finding Balance
A rushed IPO could be risky, but a longer timeline also has risks. The key is to find a balance that makes sense for your company. Map out all the actions needed and structure a projected timeline.
Regardless of your timeline, you will face risks. By securing appropriate D&O insurance before you go public, you can secure coverage for pre-IPO exposures.
Contact the Capital Market Group at NSI for D&O coverage guidance.
