Top 10 most-asked questions for IPO readiness

There are many factors that determine the length of time to complete an IPO. There is the immediate consideration of filing the registration statement with the Securities and Exchange Commission (SEC) and becoming effective, which is typically a two-to-four-month process to prepare and two-to-four-month comment period. Beyond that, there is the consideration of preparing your organization to become a public company. We recommend an initial assessment across each function to determine what incremental processes will need to be in place as a public company to determine the amount of time and effort required to go public. Typically, we recommend this assessment to be performed 18 to 24 months prior to IPO; however, in today’s market, we are seeing a much-shortened timeline. The pre-public planning is further discussed in chapter four of Strategies for going public, fifth edition.

In the current IPO environment, many companies are surprised when they are approached by a SPAC or their financial sponsors make the decision to explore the public markets. A leading practice in this environment is to become prepared for a potential IPO. This process includes an assessment of current processes, systems, and talent and identifying any changes that need to be made in order both to go public and to live as a public company. An IPO is an organization-wide transaction, and these gaps can affect board and governance, tax structure, financial reporting, internal controls, and human capital. Each of these areas will also have their own time requirements, with some areas being finalized before going effective and some after going effective. A thorough gap assessment should include a project plan of all steps and a realistic timeline required in order to address the gaps.

What is the life cycle of a SPAC transaction? SPAC transactions can broadly be split up into four phases: The deal negotiation phase; the registration statement preparation and SEC comment phase; the shareholder vote and deal close; and finally, the ongoing public company phase. The length of each phase will differ for each deal; but generally speaking, the time from the start of deal negotiation until the shareholder vote is roughly five to 10 months. Please refer to Private-Company CFO Considerations for SPACs for further discussion of the lifecycle.

What are the SEC filing requirements for a SPAC? The SEC historical financial statement requirements for a SPAC transaction can depend on a number of different factors; however, private companies can expect to need two to three years of historical financial statements audited under PCAOB standards, interim year-to-date financial statements with a comparative prior year, and all of the components that are required in an IPO or 10-K (MD&A, business section, risk factors, etc.) Refer to Strategies for going public, fifth edition for further details.

Will the smaller reporting company (SRC) or emerging growth company (EGC) still apply in a SPAC? Yes, SRC and EGC exemptions can apply in SPAC transactions; however, the application of these guidelines is more complex than in an IPO situation.

What are considerations for a carve-out to a SPAC? Carving out a business to be sold to a SPAC brings its own unique set of challenges. First, the financial statement requirements discussed above are all applicable to carve-out business, and in most cases, these financial statements are not produced on a regular basis and therefore must be created for the purpose of the transaction. If considering carving out a business to be sold to a SPAC, the seller and the buyer must build sufficient time in the overall project plan to the creation or audit of carve-out financial statements, as this is typically a very time-consuming exercise. Furthermore, in addition to the significant effort involved to create carve-out financial statements, carve-out SPAC transactions also require a full operational carve-out in order to allow for the carve-out business to operate as a stand-alone entity. This process can be very complex and is critical to the success of the carve-out business on a go-forward basis. For specific considerations regarding the carve-out of a business for purposes of a SPAC transaction, please refer to our insights and actions on Seller considerations for transactions between carve-outs and SPACs.

There are pitfalls (or perhaps more appropriately called areas of focus) that participants in a SPAC transaction should focus on.

Target company: Think through the company’s readiness in areas such as:

• Accounting and financial reporting
• FP&A
• Tax structuring and other tax matters, including controls around day-to-day provision work
• Internal controls structure and process, including internal audit
• ERP, from both a technology and cyber risk perspective

SPAC sponsor and target company:

• Ability to develop and support financial forecasts
• Securing PIPE investor support through roadshow materials and meetings

Companies need to be prepared to be a public company and meet the reporting requirements both from a regulatory perspective and regarding information provided to the market through investor relations and other public-facing management. If the company does not have a close process that is sufficient to meet public company timeliness, or if they do not have a controls infrastructure in place, they should not rush to become a public company. Lastly, if their business plans do not support a clear path to growth and profitability, they may consider delaying moving forward. Going public through a SPAC transaction significantly shortens the length of time the target company has to prepare to be public. If they have not already started that process before signing a letter of intent, they are probably too late.

Company leadership should make sure to include a communication plan with regard to the significant areas of the IPO process, as well as broader messaging about the transition from a private to a public company on its overall project plan. Communications should be tailored to the select stakeholders, including employees, the broader executive leadership team, and, for some, the current board, if applicable. The timing and content of the messaging may differ depending on the audience, but should be thoughtful.

To the extent the private company has a board, it is important to communicate to that board the IPO readiness project plan, including resources and other needs, as well as any shifts needed relating to corporate governance. Management and the board should work collaboratively to enhance the overall governance framework. A starting point in the corporate governance workstream is assessing if the current board and committee structure meet the corporate governance requirements per SEC and Listing Exchange rules (e.g., independence and other board criteria). Getting the “right” board and committees in place, from a requirements, strategic, and overall fit and cultural standpoint, is at the heart of good governance. In addition, being thoughtful about the policies and processes being implemented by management to work with the public company board and committees (e.g., board and committee meeting calendar, agendas, board information packages, and meeting practices) can help drive overall effectiveness. Understanding leading practices up front as management transitions to working with a new public company board can help set the company on a strong path forward.

Given the tight timeline and number of moving parts, a leading practice is to have someone in the organization responsible for organization-wide project management. Detailed timelines and project plans can help a company be nimble, and, just as importantly, they can quickly identify interdependencies, the need for additional resources, or areas that are at risk for delay. Project plans also position entities for life after going effective. Many companies may try to attack the process through brute force of bankers, accountants, and attorneys working on the registration statement. This process can result in the company’s registration statement going effective, but doesn’t necessarily position the company for areas outside of the registration statement or to be prepared to file with the SEC every quarter thereafter.

Beyond the registration statement, the company needs to be focused on transforming to operate as a public company. What does that mean? It may include hiring a certain skill set required (e.g., SEC financial reporting experience) or other headcount for the regulatory requirements of being a public company. It also means analyzing current process and controls across the organization to ensure various timelines can be met, from required filings with the SEC to requirements for your board of directors. See more at the link below for an article on how to plan your first few days as a public company after a SPAC merger: A Primer on SPACs – Risks and Trends.

The timing of hiring of key resources should be one of the byproducts of an overall project plan. This timing will also vary by workstream. In financial reporting, for example, a company may have a highly aggressive timeline, and it decides there is a need to outsource some of the accounting tasks to a third party. Other entities with a longer timeline may look to hire professionals with SEC reporting expertise as they begin their process. One of the considerations in this current market, with the number of private companies exploring an IPO, is the time and cost to hire people with public company experience. We are seeing many entities accelerate their job searches. Other workstreams have other key decisions. Some companies will be required to have an internal audit function in place within a year of going public. Many entities may choose to outsource internal audit for the first few years. It is not uncommon for an emerging growth company to outsource investor relations for the first few years. Lastly, an IPO requires a company to add independent board members and committee chairs. Many investment banks want to know the company’s strategy for diversity, equity, and inclusion of the board prior to being hired to represent the company in an IPO.

One area where we often see companies struggle is in focusing too much on the “event” of going public and not spending enough time preparing for life as a public company. Unfortunately, there is no rest for the weary upon an effective registration statement, as this just starts the clock on the periodic reporting required by the SEC. An important part of the IPO or SPAC execution process is building up the right people, processes, and technology in order to meet the SEC’s periodic reporting timelines for public companies. These require the filing of a 10-Q within 45 days of quarter-end and a 10-K within 90 days of year-end. These timelines also will shorten as a registrant moves into accelerated filer status. We recommend all companies going through an IPO or SPAC build out a reporting calendar to support the SEC deadlines and do practice runs prior to going public to ensure that they do not miss their first reporting deadline.