CLR Reprint - Dot.Com Millionaire

You have a great idea, you have a web site, and you have mortgaged your home and first born child. Now what do you do? How do you become the next Amazon.Com, AOL or Bill Gates? The road to riches is not always an easy one. Nor, in these changing times, is the road the same one outlined in Business 101. The following is last in a three part series designed as an outline to assist and guide you through Dot.Com mania and hype. First we covered Angel Financing, last month we focused on Venture Capital Funding, in this issue we move on to;

We can not overstate the importance of preparation to insure a successful Initial Public Offering (IPO) of securities. In the past we have focused on having a complete and well thought out business plan. In completing the first few stages of corporate funding, Angel and Venture Capital financing, we assume that you have prepared for this stage and now have a viable business with preparatory technology and are currently generating revenue in the real world marketplace. If not, an IPO is not for you. Normally an IPO comes at a time when a company is in need of major funding to open new markets and develop new product lines.

Initial Public Offerings seek to raise a minimum of 5 million to 50 million dollars. The most important thing you should know about the IPO process is that "Preparation" is everything. Generally speaking, the better prepared you are, the faster the IPO process moves toward completion, the better the chances of success.

According to Bruce R. Hallett of Brobeck, Phleger & Harrison, "The IPO process, from the first "all hands" organizational meeting until the first sale of shares to the public, generally will take from two-to-four months depending upon the complexity of your company and the extent of corporate "clean-up" necessary. But on his web site www.brobeck.com/docs/ipo.htm, he outlines 12 months of activity prior to the Initial Public Offering. Mark C. White of White & Lee, a Silicon Valley business law firm advises that you start preparing for the IPO in your initial start-up phase. He states, that in your basic Articles of Incorporation you should focus on how your Securities are created. in specifics; Dividend Rights, Redemption Rights, Voting Rights, and Board Seats, all of which will be of special interest not to only shareholders but investment bankers and underwriters especially.

Every company must fund its working capital needs until it becomes self-sufficient either by issuing debt securities (bonds) or by equity (selling stock). Anytime a corporation issues new stock it comes from "Authorized But Not Yet Issued Stock". If the corporation has sold stock before, this is known as a "Primary Offering". A company can have many Primary Offerings. If the corporation has never sold stock before it is known as an "Initial Public Offering". A company can only have one IPO. The first step for the corporation is to hire an investment bank. The investment bank will act as the advisor and the distributor. This firm is also known as the Underwriter. Underwriting is the actual process of raising capital through debt or equity.

The corporation seeking to raise capital doesn't necessarily need to use an investment bank. There are no rules that say that they have to. If they wanted to, they could actually go door to door selling their bonds or stock themselves.We strongly recommend that you do your homework when selecting an underwriter. Find one that's not only experienced in the market but familiar with SEC filings, business law, and able to work well with your management team. For they will work closely with you on setting the valuation of the corporation, amount of capital needed, type of security to be issued, and most importantly, the offering price of the security or stock. If you can discuss, negotiate and agree on these things, the investment bank or underwriter will act as the middleman between the company and the general public.

There are three basic types of agreements between the underwriter and your company; The Firm Commitment, Best Effort, and All Or None. With a "Firm Commitment" the underwriter agrees to purchase the entire issue or IPO from the company and then re-offer them to the general public. With this type of agreement the risk of the issue/IPO falls entirely upon the underwriter. If it fails to re-sell the securities it purchased, the underwriter still has to pay the agreed upon sum of money to your company. The second type of agreement is know as a "Best Effort" agreement.

With Best Effort underwriting, they merely agree to do the best that they can in selling the issue/IPO. The underwriters form a "Selling Group". Each participant in the underwriting does his best to sell his allotted share of the issue but does not guarantee the amount of capital raised. Lastly in the "All Or None" agreement the underwriter agrees to do his best to sell the entire issue/IPO by a certain date. All of the proceeds go into an escrow account. If the securities are not all sold by the certain date, the money is returned to the purchaser (general public) and the issue/IPO is canceled.

Now your ready for the Securities and Exchange Commission, the federal agency designated to regulate the sale of stocks and securities in the U.S. First you must comply with the Securities Act of 1933 by making a "Full Disclosure" and filing a "Registration Statement". Normally the underwriter will file the registration statement with the SEC. The day the statement is filed is known as the filing date. Contained in this registration statement will be a description of the business, bios on the officers and directors, equity ownership by officers, directors, and principal shareholders, complete financial statements including debt, capitalization, use of funds statements, and any legal proceedings involving the company and/or if they are aware of impending or future actions.

After the registration statement is filed the SEC requires a "Cooling Off Period". During the Cooling Off Period, the issue is considered as "In Registration". During this period the SEC will investigate and make sure that Full Disclosure has been made. Assuming the issue/IPO is approved by the SEC, the stock will be offered to the general public. This date is the "Effective Date". If the SEC does not approve the issue, a "Letter of Deficiency" is issued, The Letter of Deficiency will notify the company as to what was wrong. Thus the effective date will be postponed.

During the cooling off period the underwriter will try to drum up interest in the IPO. They do this by distributing a "Preliminary Prospectus". The preliminary prospectus is also known as a "Red Herring" because it has red printing across the top and in the margins. The underwriter or investment bank pays for the printing of the Red Herring. This document acquaints the general public with your corporation and contains much of the information from the registration statement. The public offering price and the effective date are not contained in the Red Herring. These two things are not known during the cooling off period. Generally, the public offering price is determined on the effective date. That way, the issue can be priced in accordance with current market conditions.

While In Registration the underwriter may not provide any other information to its clients other than what is contained in the Red Herring. They can't provide research reports, recommendations, sales literature or anything from any other firm about the company. They can only provide the client with the Red Herring or preliminary prospectus. If the underwriter or investment bankers clients (the general public) are interested in the IPO, the client will give his stockbroker an "Indication of Interest". The stockbroker can't sell or take an order for the IPO from the client. All the client is allowed to do is indicate that he is interested. The higher the indication of interest is from clients, the better for the offering. In fact, it will probably aid the underwriter in making pricing decisions.

Normally during this cooling off period, you will be focused entirely on the preparation and filing of the registration statement, marketing the IPO on a "road show" and responding to comments on the registration statement from the SEC. Just before the Effective Date the underwriter will sit down with you and have a "Due Diligence" meeting. They will iron our any last minute things which have come up. And they will make sure that there are no material changes which have taken place between the Registration Date and the Effective Date.

Once the Effective Date arrives, the security can be sold and money collected. Also the "Final Prospectus" is issued. This will be very similar to the Red Herring, except it will have the missing numbers for the public offering price and the Effective Date filled in. From that point forward, your management team and underwriters will be completely absorbed in filing applications to list your company's stock on a national exchange such as the NASDAQ National Market as well as marketing and promoting your IPO.

We wish to thank all those who have contributed to making this three part series a success

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This web site contains "Trademarks" and "Copyrighted" material licensed to other entities and cannot be reproduced, altered, or used in any form without prior written permission. Please read our Terms Of Use for compliance information.