As 2010 began, there was increased optimism that the market for IPOs would return after a long and painful hiatus. While the stock market's gyrations during the first quarter have dampened expectations somewhat, many medical device companies continue to explore the possibility of an IPO. The key for those companies is to be prepared to take advantage of an IPO opportunity when it arises. Many of the factors that affect the IPO market are beyond a company's control — economic downturns, market turmoil, interest rate changes, unexpected military or terrorist events, poor performance by competitors, and similar issues.
The IPO process realistically takes at least six months to complete from the time a company begins talking with investment bankers, assuming there are no company-specific problems that take longer to resolve. So how can a company minimize the chances of problems that could delay or derail an IPO? Here is a list of issues to consider:
- Settle on your management team. If you plan to upgrade your management team, do it as part of your IPO planning process. Your team will need to be able to “sell” your story and inspire confidence in the investor community.
- Look into directors and officers liability insurance. Board members of public companies will insist on D&O insurance, and it takes time to put in place.
- Make sure key contracts can be disclosed in your prospectus. If you need third-party consents to disclose the existence of contracts, get permission now, before you lose leverage. In general, it is a good idea to include language in any contract that permits disclosure “as required by law, including any governmental filings.”
- Think about confidentiality treatment requests. Key contracts need to be filed as exhibits to the company's registration statement. The SEC generally permits only limited provisions to be redacted, typically royalty and milestone payments.
- Know your investors. Make sure all of the company's equity and debt issuances have been properly documented.
- Think about cheap stock issues. The SEC may require valuations for all stock and option issuances to employees, directors, or consultants for up to 18 months prior to an IPO in order to avoid incurring earnings charges on the company's financial statements from those grants. If the company is not already doing valuations for stock options for 409A deferred compensation purposes, consider starting valuations now, and get the consent of the valuation firm to provide copies of their reports to the SEC if necessary.
- Address intellectual property issues. It is critical to a successful offering, and to attracting interest from investment bankers, to make sure you own or have sufficient license rights to all of your IP. Make sure you have assignments of inventions from all inventors — they will come out of the woodwork once they hear you are going public.
- Engage your key IPO advisors. These include your accountants and lawyers (corporate, FDA, IP, and any other special needs the company might have). There are many moving pieces in the IPO process, so organization and experience is critical. The company's lawyers need to know the company to give the legal opinions required by underwriters, and accountants need to complete audits, including for any significant acquisitions the company has made in the recent past.
- Become SOX-compliant. Many of the requirements of the Sarbanes Oxley Act apply as of the date a company first files its registration statement with the SEC, not the effective date of the IPO. For example, the company needs to have independent board members and committees, including an audit committee financial expert, and needs to eliminate any loans to officers and directors. Plan to have processes in place regarding insider trading and proper reporting procedures for the company's ongoing SEC and stock exchange requirements.
- Clean up your Web site. Both the SEC and prospective investors will scrutinize the company's Web site. The company needs to make sure statements are true and supportable; eliminate links to third-party sites; and be prepared to continuously revise the Web site as the company's registration statement is drafted, filed with the SEC, and amended.
- Develop a practice of issuing press releases. The SEC will scrutinize press releases during the “quiet period” after a company files a registration statement. If the SEC believes the company is issuing press releases to condition the market for the sale of its stock (so-called “gun jumping”), it can delay the IPO and create potential liability for the company. Quiet period press releases must be consistent with past practice, so get in the habit of announcing factual information about the business in press releases intended for customers and suppliers such as landing key contracts or hiring key employees.
The IPO process is lengthy and complex, and there are inevitably surprises along the way and problems to address. Even for companies with good histories and good opportunities, setbacks and delays are the rule, not the exception. But by planning ahead, a company can position itself to take advantage of an IPO window when the time is right.