How Does a Company Qualify to IPO?
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IPOs and Listing Requirements
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Strictly speaking, there are no specific qualifications for a company to issue publicly traded stock. The greatest restrictions are actually the listing requirements necessary to have a stock listed on the major stock exchanges. These listing requirements include several millions of dollars in tangible assets and the filing of public financial records. Any publicly issued stock of a company that does not meet these listing requirements can list and trade on the Nasdaq OTC bulletin boards with other "penny stocks" and illiquid securities.
Attracting Investors
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There are many benefits to issuing stock, but the limiting factor is the ability of a company to find investors willing to buy the stock and institutions to finance the offering. Generally, these investor groups look for businesses with existing customers and sales, experienced management teams, strategic partnerships and an existing capital base. Furthermore, investors will favor companies in industries that promise growth of 25 percent or more in the short term, and that have distinct competitive advantages over similar businesses. At any given moment, there's only so much money available for IPOs, and that money will go to companies that can make the most convincing presentation to investors and ensure return on investment. It's common practice for management teams to travel the country and meet with stock brokers and investment firms to sell their company's IPO to potential investors.
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Registration Process
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The process of registering an IPO with the Securities and Exchange Commission can be lengthy and costly. The registration documents are usually prepared by specialist attorneys and accountants at costs of up to $200,000 or more. Underwriters will take a fee for their services, and the costs of transporting a management team to make presentations can also be considerable. During the registration process, the company will be thoroughly analyzed to present a clear picture of the risks and prospects of the business. The potential benefits of issuing stock usually outweigh the costs, but registration is not a guarantee of a successful IPO. As mentioned, after registration the IPO will depend on convincing investors and underwriters to sign on to fund the stock issuance. The investors and underwriters will determine the company's anticipated market capitalization, meaning the appropriate value of its stock once issued. This includes tangible assets plus a realistic premium for future earnings based on prevailing market conditions. Companies with a market capitalization below $100 million probably won't attract the attention of major analysts and investment firms, meaning their stock can remain relatively illiquid.
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