IPO process: Accounting and considerations guide

After a record-breaking year for initial public offerings (IPOs) and special-purpose acquisition companies (SPACs) in 2021, the market has remained slow for several years amid various challenges, including volatile markets; geopolitical conflicts; interest rate increases; inflation and supply chain issues. However, interest rates and inflation have been moderating, and private companies are continuing to evaluate the methods used to go public. Such methods include (1) “traditional” IPOs, in which private companies sell their equity in a public underwritten offering, and (2) nontraditional IPOs, which have become more popular over the past several years. Nontraditional IPOs include those in which private operating companies choose to merge with SPACs to raise capital or use other financing alternatives, such as direct listings. Companies can also go public by registering debt securities, distributing shares in a spin-off transaction, or registering securities issued by real estate investment trusts (REITs).

Before a company commences a public offering of securities, it must file a registration statement with the SEC under the applicable securities laws. Both the form used to file the registration statement and the filing and review process will depend on the nature of the offering. Companies undertaking a traditional IPO can voluntarily submit a draft registration statement to the SEC staff for confidential, nonpublic review. The ability to submit confidentially is a significant benefit because it allows companies to keep potentially sensitive information from customers or competitors until later in the IPO process. Confidential initial submissions are subsequently filed publicly no later than 15 days before (1) a roadshow or (2) the requested effective date of the registration statement if no roadshow is planned.

Once submitted to or filed with the SEC, a registration statement is reviewed by the staff of the SEC’s Division of Corporation Finance, which will generally complete its initial review and furnish its first set of comments within 27 calendar days. The company then responds to each of the staff’s comments and reflects edits to the draft registration statement in an amended filing, which the staff will also review. A company can expect several rounds of comment letters containing follow-up questions on responses to original comments as well as additional comments on new information included in the amended registration statement. After the initial review, subsequent comments are typically furnished within two weeks. For more information about typical SEC staff comments, see Deloite’s Roadmap SEC Comment Letter Considerations, Including Industry Insights.

Identifying the required financial statements

A company must determine what financial statements are required in the registration statement. While this determination may appear straightforward, additional complexities may arise because a company may first need to determine the legal entity that will become the SEC registrant. For example:

A company may succeed to substantially all of the business of another entity (or the “predecessor”) for which financial statements are required.

A company may be a carved-out entity that previously existed only as a subset of a larger parent entity or may be a combination of individual entities joined to form a larger public company.

A company, a subsidiary, or a subset of subsidiaries may issue securities, guarantee securities, or otherwise have dividend restrictions that trigger requirements for the inclusion of separate financial statements or financial statement schedules in the IPO registration statement.

Further, a registrant may need to consider whether separate financial statements or pro forma financial information is required for “significant” business acquisitions, dispositions, or equity method investments. 

The financial statement periods to be included in the IPO registration statement depend on the company’s characteristics and the timing of the document’s submission. Smaller reporting companies (SRCs) and emerging growth companies (EGCs) generally have the option of presenting only two years of audited annual financial statements in a traditional IPO, while all other entities must present three years. Further, under SEC regulations, the financial statements in an IPO must meet certain age requirements as of each registration-statement filing date as well as when the registration is declared effective; otherwise, the financial statements will be considered “stale.” In general, the financial statements in an IPO filing must not be more than 134 days old (i.e., the gap between the date of filing or effectiveness and the date of the latest balance sheet cannot be more than 134 days). However, third-quarter financial statements are considered timely through the 45th day after the most recent fiscal year-end, after which the audited financial statements for the most recent fiscal year are required. Thus, a company that fails to file a registration statement before one of these critical cut-off dates will be required to include additional financial statement periods in the registration statement; in such cases, there may be a significant delay in the company’s preferred IPO timeline.