June.16.2020
The U.S. IPO market has re-opened in a big way: demand is up substantially after a dip in March and April, and the outlook for companies looking to list on Nasdaq or the NYSE, particularly for life sciences companies, is returning to normal. From January through May 2020, 71 companies went public on Nasdaq and the NYSE, raising over $23.1 billion. Investors are hungry for strong biotech, pharmaceutical and technology companies looking to reach the broader U.S. public market—dozens of these companies have launched or announced IPOs since April 2020. High-growth pre-revenue, clinical-phase and revenue-generating biotech and pharmaceutical companies with strong drug or product pipelines and technology companies with compelling business plans are in hot demand, as investors seek investments with strong growth potential. While a growing number of companies have queued up to list in the second half of the year if market conditions remain favorable, many companies are now readying to list in the first half of 2021.
It takes, on average, six months for European companies to prepare for an initial U.S. listing and IPO, while for companies with an existing European listing, four months might be possible. If you've been considering testing the waters with a U.S. listing, this summer is the perfect time to turn your attention to getting your company primed and ready to approach U.S. investors. Much of the pre-IPO preparatory work can be done remotely, such as designing and testing your systems, evaluating risk, assessing your organization, refining your marketing story, strengthening your long-term business plan and engaging auditors and lawyers to dig into your operations and recommend steps to transform your business from a private company into a public company.
Here are four key workstreams for you to focus on now:
U.S.-listed companies must maintain a system of internal controls over financial reporting that is robust, assessed annually and effective to maintain accuracy in public reporting. Designing a system that complies with U.S. listing standards (commonly referred to as 'SOX 404', after the Sarbanes-Oxley Act section introducing the requirement) requires a substantial amount of management time and attention. The first step is to select a control framework. U.S.-listed companies typically use the Committee of Sponsoring Organizations of the Treadway Commission (COSO) Internal Controls—Integrated Framework, which articulates the five necessary components for an effective system of internal controls: control environment, risk assessment, control activities, information and communication and monitoring. Engaging an outside consultant to help you design an effective system is worth the cost and will ensure that your systems are sufficiently robust for on-going material development disclosure. If you are aware of any material weaknesses, design and implement a remediation plan.
The next question is whether you have the right IT systems for internal control monitoring and assessment, and whether those systems are properly aligned for prompt and efficient reporting. You'll want to ensure that your systems reduce redundancies and eliminate bottlenecks, as well as being sufficiently automated so as to avoid human error.
Finally, if your operations are global or joined across various branches and jurisdictions, you may consider introducing a global compliance officer function, with reporting and liaison to every core domain function, who can help management risk reporting and coordinate with a robust internal audit function.
You'll need to open your company to significant scrutiny from teams of lawyers, accountants and bankers. Start your risk audit with an experienced U.S. disclosure counsel who can help guide your team on a risk review to determine what should be addressed before you open your company to public investors. A risk audit will review topics such as your material litigation and potential disputes, licensing and regulatory compliance, contract compliance, local law compliance, export control, competition law, and reputational risks generally. You will also want to focus on your regulatory approvals and licenses, your intellectual property protection, and your cyber, data and privacy situation. Identifying, and fixing, problems before the bankers and their lawyers become involved will save everyone time, money, hassle and a potentially embarrassing busted deal.
You'll also need to assemble a virtual data room, with complete and accurate copies of all contracts, board materials, corporate documents, corporate policies and employment files. Gathering materials from various document management systems, or finding paper documents and scanning them, can take time. Ensuring that you are not breaching confidentiality by disclosing materials, determining what key commercial information should be redacted in accordance with the SEC's confidential treatment process, and testing that your relationships with key partners, suppliers, agents, distributors and investors will not be disrupted by an IPO, are best approached well in advance of an IPO.
Are your independent public auditors qualified to issue audit opinions for a U.S.-listed company, and have your financial statements been audited to an appropriate U.S.-listed company standard? Financial statements prepared under IFRS are generally acceptable (no U.S. GAAP reconciliations are required), but you might need to run some additional auditing procedures, re-evaluate some judgments and assumptions and possibly re-audit financial statements. Doing so can be time consuming, so best to start as early in the process as you can.
Consider your corporate structure. Would a U.S. company at the top of the structure provide marketing, investor or government contract benefits? Evaluate whether inserting a new top-co would provide tax, financial, marketing or operational benefits. Evaluate your current subsidiary structure to determine the optimal structure for financing and intercompany loans, subsidiary operations, intellectual property rights and employee and compensation.
Finally, review your debt profile and consider whether restructuring or refinancing any debt would improve your capital structure.
Think about how key investors evaluate your business in the medium term and long term, and how they view the opportunities, risks and rewards of investing in your company. Should you bring on a new cornerstone investor or crossover investors in advance of the IPO? How would key investors view your strengths and weaknesses? Really challenge management to articulate a clear investor-focused story about your company, your innovations, your clinical trials, your R&D, your partnerships, your products, your strategic priorities and your prospects for growth. What is the pipeline for new sales, new products and new opportunities? How is your product market developing and what makes your product unique or distinctive? What is your capital structure and KPIs? Should you consider strategic investments, or divestitures, to strengthen your investor story?
You'll need to be sure your management team really understands your business, the real-time risks it is facing, and the challenges it is undergoing to effectively describe them. A U.S. IPO listing prospectus requires very detailed disclosure of a company's business and a quantification of the litany of risks to which it may be exposed, which must be carefully tailored to your business. Especially now, as the world remains volatile, careful and specific descriptions of the risks your company faces are crucial for accessing the U.S. market, which can be unforgiving to companies with inadequate disclosure.
Also key at this stage is a comprehensive and honest evaluation of your weaknesses. Will any of your activities, investments, constituents or actions detract investor focus from your strengths? If you can remediate any of these issues, now is the time to do so. Consider hiring an investor relationship manager and make sure someone can effectively interface with shareholders and the investor community.
Finally, spend some time looking at the environmental and social impact of your operations and your ESG (Environmental, Social, Sustainability & Governance) policies. Consider implementing best practice policies and building a company that mirrors U.S.-listed company best practices.
With some advance planning this summer, you'll be ready to kick off a U.S. IPO process this autumn, putting your company in position to launch an IPO in 2021 as soon as you see a market opportunity, taking your company to the next level.