Initial Public Offerings Overview
Initial Public Offerings Resources
A small business seeking to raise capital may wish to consider an initial public offering (IPO). An IPO is the first public sale of a corporation's common shares. When deciding whether to go public, a small business must weigh the pros and cons of IPOs. While a public offering may result in increased capital and media attention, it will also impose new obligations on the business.
Regulation of IPOs
IPOs are governed primarily by federal securities laws, including the Securities Act of 1933 and other legislation enforced by the Securities and Exchange Commission (SEC). An IPO may also be regulated by state securities laws, known as Blue Sky laws.
Registration Requirement
If a business intends to list their offering on a national stock exchange, the IPO cannot be made until the offering is registered with the SEC, or qualifies for an exemption from SEC registration requirements. The first step in the registration process requires the business to develop a detailed prospectus, also known as a registration statement. The prospectus outlines the company's operations, finances, history, and other relevant information sought by the SEC. The prospectus must clearly set forth all risk factors that the company currently faces or may face in the future. The prospectus must also include financial statements audited by an independent certified public accountant. Companies that qualify as a small business issuer (companies with less than $25 million in revenues or outstanding public stock) may be eligible to file a simplified version of the registration statement. After a business submits it completed registration statement, the SEC reviews it in depth. Businesses may incur civil or criminal liability for any false or misleading information contained in their prospectus. If the SEC determines that the statement is accurate and contains all relevant disclosures, the company may begin selling securities. The company is obligated, however, to file regular reports with the SEC disclosing certain information about the company. These disclosures become public at the time of filing.
Exemptions from the Registration Requirement
Some small businesses may be exempt from the SEC's registration requirements. If a business is exempt, they may offer and sell securities without registering with the SEC. The most common exemptions include the Intrastate Offering Exemption, the Private Offering Exemption, Regulation A and Regulation D.
- Intrastate Offering Exemption. The intrastate offering exemption, located in section 3(a)(11) of the Securities Act, is available to companies that are incorporated in the state in which they are selling securities. The company must carry out a significant amount of business in that state, and make offers and sales of securities only to residents of that state.
- Private Offering Exemption. Section 4(2) of the Securities Act sets forth the Private Offering Exemption. Under the Private Offering Exemption, those who purchase securities must qualify as "sophisticated investors" or be able to bear the investment's economic risk. Purchasers must also have access to the type of information normally provided in a prospectus and must agree not to resell or distribute the securities to the public.
- Regulation A. Regulation A, authorized by section 3(b) of the Securities Act, exempts from registration small securities offerings. A small securities offering is an offering that does not exceed $5 million in any 12 month period. Regulation A exemptions require a business to file an offering circular, which is similar to a prospectus.
- Regulation D. Regulation D provides three exemptions to the SEC's registration requirement: (1) Rule 504, which exempts offerings of up to $1 million in a 12-month period; (2) Rule 505, which exempts offerings of up to $5 million in a 12-month period, so long as the offerings are sold primarily to accredited investors; and (3) Rule 506, which serves as a safe-harbor provision for companies who satisfy various requirements set forth by the SEC.
State Law Requirements
In addition to satisfying SEC regulations, small businesses considering public offerings must also comply with state securities laws. A majority of states require businesses to register with the state before making a public offering. Many states, however, recognize the Small Company Offering Registration (SCOR), which allows small businesses to use a simplified registration form. Small businesses may also use the SCOR to satisfy filing requirements under the SEC's Regulation A exemption.