FAQs on IPO

Q. What is an IPO?

An initial public offering (IPO) or stock market launch, is the first sale of stock by a company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises.
Q. Why do companies choose to IPO?

When a company lists its securities on a public exchange, the money paid by investors for the newly issued shares goes directly to the company (in contrast to a later trade of shares on the exchange, where the money passes between investors). An IPO, therefore, allows a company to tap a wide pool of investors to provide itself with capital for future growth, repayment of debt or working capital. A company selling common shares is never required to repay the capital to investors.

Once a company is listed, it is able to issue additional common shares via a secondary offering, thereby again providing itself with capital for expansion without incurring any debt. This ability to quickly raise large amounts of capital from the market is a key reason many companies seek to go public.
Q. What's the difference between a Direct Public Offering and an Initial Public Offering?

An IPO us usually is underwritten by an underwriter, typically an investment bank or a syndication of investment banks. The underwriter will buy shares from the company (issuer) and turn around to resell those shares to the banks clients and the public market. Typically, those are issuers of a certain size and have gained tremendous publicity. Registrations such as SCORs, Reg As, SB-1, and SB-2 are normally too small to attract the attention of national underwriters.

A DPO is similar to an Initial Public Offering (IPO) in that stock is sold to investors, but unlike an IPO, a company uses a DPO to raise capital directly and without the assistance of an investment banking firm or broker-dealer. Direct public offerings are primarily utilized by small to medium size companies who are unable to attract the interest of an investment banking firm to represent them in a traditional initial public offering.
Q. What is the background and history of DPO?

Small businesses were not able to access the public financial market until fairly recently. IPOs typically require difficult and extensive registration compliance. The costs associated with the process such as underwriting fee, legal and accounting fee, printing cost, transfer agent fees etc. are prohibitively high -- typically average between $250,000 and $500,000 for an offering of between $5 million and $20 million. Hence, entrepreneurs were not able to access public capital. In the case of IPO's, when a company becomes publicly traded, it also becomes a reporting company. That, in addition to other requirements of the Securities and Exchange Commission (SEC), increased the administrative costs of the issuer. DPO's do not have the same types of costs associated with them.

The process of simplifying public stock offerings for small businesses began after Congress passed the Small Business Investment Incentive Act of 1980. the Securities and Exchange Commission ("SEC") conferred to individual states the oversight of many securities offerings under $5 million. The goal was to streamline the application, information disclosure, and prospectus process into a single document which could be completed the limited professional assistance and at a low cost.

Previously, Regulation A permitted exemption from registration for public offerings up to $1.5 million. The SEC raised the exemption ceiling to $5 million, and provided for an alternative form of disclosure document similar to the SCOR document.

The SEC developed a new integrated registration and reporting system, known as Regulation S-B. The S-B series disclosure system includes Form SB1, which permits registration of up to $10 million, and Form SB2, which permits unlimited registration.
Q. What are the paths for a Direct Public Offering?

i. REG-D Private Placement
iii. SB-1
iv. SB-2
v. REG-A
Q. What Is A Regulation D(Reg D) offering?

Private Placement According to the 1933 Act, it clearly states that it is against the law to sell securities unless one is licensed or qualify for an exemption from SEC rules. "it is unlawful for any person, directly or indirectly to sell a security unless a registration statement has been filed, or to sell a security or deliver a security after the sale unless a registration statement is in effect." Such rule does not meet small companies? needs to raise capital.

A Regulation D offering is intended to make access to the capital markets possible for small companies that could not otherwise bear the costs of a normal SEC registration.
Q. What are the rules under A Regulation D(Reg D) offering?

There are 6 basic rules within Reg D (Rule 501-506).

Rule 501: covers the definitions of the various terms used in the rules.

Rule 502: contains the general conditions that must be met to take advantage of the exemptions under Regulation D. Generally speaking, these conditions are (1) that all sales within a certain time period that are part of the same Reg D offering must be "integrated", meaning they must be treated as one offering, (2) information and disclosures must be provided, (3) there must be no "general solicitation", and (4) that the securities being sold contain restrictions on their resale.

Rule 503: requires issuers to file a Form D with the SEC when they make an offering under Regulation D.

Rule 504: provides an exemption for the offer and sale of up to $1,000,000 of securities in a 12-month period. The company may use this exemption so long as it is not a blank check company and is not subject to Exchange Act of 1934 reporting requirements. General offering and solicitations are permitted under Rule 504 as long as they are restricted to accredited investors. The issuer need not restrict purchaser's right to resell securities. Rule 504 allows companies to sell securities that are not restricted if one of the following conditions is met:

i. The offering is registered exclusively in one or more states that require a publicly filed registration statement and delivery of a substantive disclosure document to investors;

ii. The registration and sale takes place in a state that requires registration and disclosure delivery, and the buyer is in a state without those requirements, so long as the disclosure documents mandated by the state in which you registered to all purchasers are delivered; or

iii. The securities are sold exclusively according to state law exemptions that permit general solicitation and advertising and you are selling only to accredited investors. However, accredited investors are only needed when sold exclusively with state law exemptions on solicitation.

Rule 505: Rule 505 provides an exemption for offers and sales of securities totaling up to $5 million in any 12-month period. Under this exemption, securities may be sold to an unlimited number of "accredited investors" and up to 35 "unaccredited investors". Purchasers must buy for investment only, and not for resale. The issued securities are restricted, in that the investors may not sell for at least two years without registering the transaction. General solicitation or advertising to sell the securities is not allowed.

Financial statement requirements applicable to this type of offering:

i. Financial statements need to be certified by an independent public accountant;

ii. If a company other than a limited partnership cannot obtain audited financial statements without unreasonable effort or expense, only the company's balance sheet, to be dated within 120 days of the start of the offering, must be audited; and

iii. Limited partnerships unable to obtain required financial statements without unreasonable effort or expense may furnish audited financial statements prepared under the federal income tax laws.

Rule 506: A company that satisfies the following standards may qualify for an exemption under this rule:

i. Can raise an unlimited amount of capital;

ii. Does not use general solicitation or advertising to market the securities;

iii. Sale of securities can be to an unlimited number of accredited investors and up to 35 other purchasers. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated - that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment;

iv. Seller must be available to answer questions by prospective purchasers;

v. Financial statement requirements as for Rule 505; and

vi. Purchasers receive restricted securities, which may not be freely traded in the secondary market after the offering.

Regulation D contains the kind of exemptions that many small business persons have been looking for. These exemptions can easily be used in private or limited offerings. Thus the Regulation D private place document, better known as the Private Placement Memorandum, has been considered to be one of the most workable exemptions for small offerings.
Q. What is typically required to initiate a REG-D Private Placement?

i. A thorough business plan
ii. A Private Placement memorandum (PPM) that fully discloses all the pertinent facts of the investment and business
iii. Potential investors or a placement agent to locate potential investors;
iv. Most importantly, a law firm or lawyer experienced in Private Placements and the creation of Private Placement Memorandums.
Q. What is SCOR (Small Corporate Offering Registration)?

SCOR (Small Corporate Offering Registration) is a form of corporate securities registration aim to reduce the paperwork requirements for small companies seeking to raise capital through the public sale of shares. Companies can raise up to $1 million using the small corporate offering and save on IPO costs. It is often referred to as an over-the-counter (OTC)sale of securities, as the securities are not traded on an exchange. Instead, they are traded via broker dealer and over the phones.

In order to qualify for this type of registration, a company cannot be considered an investment company or involved in energy, and it must have a valid business plan.
SEC Filing for SCOR?

A small company can use the SCOR Form, also called Form U-7, to satisfy many of the filing requirements of the SEC's Regulation A exemption, for sales of securities of up to $5 Million since the company may file it with the SEC as part of the Regulation A offering statement. Furthermore, in some cases, 2 years of audited financial statements may be required in some states which you file, (although typically not required for SCOR offerings under NASAA's SCOR Statement of Policy) these should be included with the Form U-7 filing.
"Blue Sky" State Filing for SCOR?

Both federal and state levels of regulations must be complied within a SCOR-based DPO as well as with any IPO. State regulations are called Blue Sky laws. Blue Sky laws were designed to protect investors from "unscrupulous" issuers of stock. Since its inception in 1987, SCOR filings have been adopted in 48 states. Some states may require minimum amounts to be raised before the DPO candidate may access the raised capital.
Q. What is SB-1 Filing?

A filing with the Securities and Exchange Commission (SEC) that is required to be used by issuers with revenues (and public market float) of less than $25 million. SEC Form SB-1 registers offerings of up to $10 million of securities, as long as the company has not registered more than $10 million in offerings during the previous 12 months and current outstanding securities do not total more than $25 million. This form is a simplified version, which requires less detailed information (such as less detailed financial statements, and omission of summary data) about the issuer's business than SEC Form S-1.

The offering is an SEC registration and involves a detailed Prospectus. Blue Sky State filings are required within any state stock subscriptions are sold. The SB-1 filing requires audited financials, the last fiscal year's balance sheet and the last 2 fiscal year's income statements plus unaudited interim financials.

The type of disclosure required is the Model A, Form U-7 or Model B under Regulation A.
Q. What is SB-2 Filing?

A filing with the Securities and Exchange Commission (SEC) required for small businesses with revenues and public market float of less than $25 million. It is used to register securities to be sold for cash. This form requires less detailed information regarding the issuer's business than SEC Form S-1 does. It allows for the omission of summary data and less detailed financial disclosure. The offering is considered a full-blown registration and involves a detailed Prospectus. Blue Sky State filings are required within any state in which stock subscriptions are sold. The SB-2 filing requires audited financials, the last fiscal year's balance sheet and the last 2 fiscal year's income statements plus unaudited interim financials.
Q. What is a REG A?

In simple terms, Reg A is a Securities and Exchange Commission (SEC) regulation that governs offerings of $5 million or less, which qualify for simplified registration (an exemption). Regulation A is designed to assist small companies in their capitalization by issuing stock directly to the public. This process is called a Direct Public Offering since the offering is usually not underwritten by an Investment Banker. It is an ideal for issuers to raise as much as $5 million within a 12-month period.

The filing is exempted from the filing provisions of the SEC Act of 1933 which means that the DPO candidate will not have to file a registration statement with the SEC although, as with any public company, compliance with antifraud and personal liability provisions of the SEC Act of 1933 is a requirement.
SEC Filing for Reg-A

Same disclosure requirements as a registration statement apply here. Issued is required to file an offering circular( Prospectus) with the SEC in which discloses potential risk factors , financial information, use of the proceeds, profiles of key professionals and board members etc. If the issuer has a pre-existing audited financial statement s it must be included in the offering circular, if not, it is not currently a mandatory requirement by SEC.
"Blue Sky" State Filing for Reg-A

Both federal and state levels of regulations must be complied within a DPO as well as an IPO. State regulations are called "Blue Sky" laws. Blue Sky laws were designed to protect investors from "unscrupulous" issuers of stock. Regulation A filings are not exempt from state Blue Sky securities laws and some states require that the DPO candidate produce 2 years audited financial statements. Filing requirements as well as fees can differ from state to state.
Q.What is a typically qualified candidate for Reg-A?

The DPO candidate must not be a reporting company; must have developed a comprehensive business plan; may not be an Oil and Gas company or Investment company; and the Directors, Officers, controlling shareholders, and underwriters must not have been suspended from a securities association; convicted, during the last 10 years, of a securities violation; or subject to an injunction because of securities violations. Important to note is that the SEC reserves the right to waive certain circumstances if there are grounds for acceptance.
Q. What is a "Test the Waters" Provision under Reg-A?

One of the most innovative changes affected by the Small Business Initiatives is the 'test the waters' provision. As the name suggests, it allows issuers to solicit indications of interest from prospective investors before the issuer incurs the expense of preparing the offering circular and financial statements. The issuer may deliver a written document or make scripted radio or television broadcasts. There are no specific content requirements for the written documents, broadcasts or oral communications, but each are subject to the anti-fraud provisions of the federal securities laws. No binding commitment or solicitation or acceptance of money is permitted, and no sale may be made until the offering circular has been qualified by the SEC. The issuer is required to submit a copy of any written document or script of any broadcast with the SEC's regional office on the date of first use. However, failure to file such a written document or script shall not disqualify the exemption.
Q. Why choose Invictus Global Capital?

We understand that as a new issuer to the capital market you might be overwhelmed by the numerous filing paths and securities regulations. Invictus Global Capital is here to help, recommending to clients how to take company public.

Our professional team is composed of senior legal and finance professionals who will listen closely to your needs for capital and advise you on the steps to going public. Our sophisticated decision matrix tool will help you to determine which filing path is the most effective and cost efficient for your needs.