Chapter 8. Closing the deal

You have come a long way: stay focused as the IPO is around
the corner.

The closing of a public offering is not a simple affair, as it is governed by both the underwriting industry’s traditions and government regulation through the SEC. It is important that everything be done properly, so as not to risk wasting the long and costly preparation work and damaging the public perception of your company.


Signing the underwriting agreement
Generally, you do not enter into a written underwriting
agreement until the end of the IPO process, after the
registration statement is declared effective by the SEC and
the offering price has been determined.
Until that time, you have only a draft copy of the
underwriting agreement (that has been negotiated
by your attorneys and the underwriters’ counsel) and
an oral understanding with the underwriters. The
oral understanding with the underwriters is not a
legal commitment by either side to proceed with any
predetermined transaction.
Timing becomes quite important as the effective date of the
registration statement approaches. The end of the roadshow
and the completion of the book-building process (resulting,
it is hoped, in significant public momentum for the offering)
are targeted to occur at about the same time as the SEC
review process is completed. The registration statement
is then declared effective by the SEC. On that day, the
lead underwriter and the board (or the pricing committee
of the company), which is responsible for reviewing the
underwriter’s report of indications of interest and allocation
of shares, as well as agreeing on final pricing, agree on the
selling price to the public. The lead underwriter and the
other underwriters participating in the syndicate also legally
agree to their participation in the underwriting.
The agreement among underwriters authorizes the lead
underwriter to sign the underwriting agreement, specifies
the terms on which the other underwriters will participate in
the syndicate, and spells out the responsibilities of the lead
underwriter to manage the offering.
Immediately after the pricing of the offering, the
underwriting agreement is signed by the company, the
lead underwriter, and the selling shareholders, if any.
The agreement includes the offering price of the stock;
commissions, discounts, and expense allowances; the
method of underwriting; representations and warranties;
and an indemnification agreement. It also sets a number
of conditions to the underwriters’ obligation to complete
the offering (for example, that there is no material adverse
development impacting the company between pricing and
closing). Until the underwriting agreement is signed, the
company has no legal right to compel the underwriters to
proceed with the IPO. Once the underwriting agreement is
signed, the company files a Rule 424 final prospectus with
the SEC and actual sales commence.
As a practical matter, once preparation of the registration
statement begins, underwriters rarely refuse to complete
the offering, unless significant adverse changes in market
conditions occur or the registration process reveals serious
problems at the company of which the underwriters were
previously unaware. The lead underwriter has substantial
motivation for completing the offering, since it has
invested considerable time and expense in investigating
the company’s business and affairs, helped to prepare the
registration statement, and organized a selling syndicate.
The public perception of a failed IPO is damaging to the
reputations of both the company and the lead underwriter.
Should the market cool significantly during the waiting
period, however, it is not unusual for an IPO to be
postponed or canceled after the registration process starts. If
the market is not willing to accept the originally anticipated
price range or to absorb an offering as big as the one
contemplated, the company may be faced with the choice
of accepting an offering of unsatisfactory size or price,
postponing the offering until the market improves, or even
abandoning the IPO altogether and pursuing other financing
options. Additionally, if the final size or pricing of the
offering is outside the range originally on the distributed red
herring prospectus, it may be necessary to recirculate a new
red herring prospectus with an updated price range.



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