Forming a corporation doesn't give you the right to sell its shares publicly. Without registration with the Securities and Exchange Commission, you can only sell shares to accredited investors who comply with the SEC's Regulation D. These investors include corporate insiders, institutional investors and wealthy individuals. However, if your corporation complies with SEC registration requirements it can hold an initial public offering (IPO) and sell shares to the public through listing on a stock exchange.
1. Submit a proposal to commence an IPO to the corporation's board of directors and obtain approval. This will require an extensive examination of the company's financial position.
2. Revise the company's financial statements for the past five years so that they comply with Generally Accepted Accounting Principles (GAAP), if necessary. This process is usually undertaken under the guidance of an independent accounting firm.
3. Sign a letter of intent with an investment bank who will oversee the IPO process and locate qualified investors. The investment bank will collaborate with other investment banks to market the IPO shares.
4. Draft a corporate prospectus. The prospectus is an extensive document that must be shown to potential investors and filed with the SEC. It provides a description of the corporation, its management, its financial position, its shareholders and its operations. It also states how the company intends to use proceeds from the IPO, and describes its dividend policy.
5. Perform due diligence, which is an extensive investigation into the accuracy of the information. It appears in the prospectus, and is undertaken by the investment bank. After due diligence is completed, the corporation must revise the prospectus in light of the due diligence findings.
6. File the prospectus with the SEC. The SEC normally requires revisions and requests additional information in a back-and-forth process that can take several weeks. At the end of this process, the SEC will declare the company's registration effective as of a particular date, after which point its shares will be listed on an appropriate stock exchange.
7. Present the prospectus to potential investors. The investment bank and company management perform this function. Although the actual sale of shares does not take place at this point, investors gain familiarity with the corporation and may ask questions.
8. Price the IPO shares and determine the number of shares to be offered. Although the investment bank prepares recommendations on both of these matters, they must then be approved by the company's shareholders.
9. Deliver copies of the prospectus to the investment banks the company is working with. They will market the shares to investors and finalize the sale of shares.
10. Print share certificates and deliver them to all new shareholders.
- If the IPO results in a company having more than 100 total shareholders, it will not be eligible for S corporation status. Corporate income will be taxed twice -- once at the corporate level, and again when it is distributed to shareholders.
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