Going Public in the USA and the Valuation of IPOs

The WACC approach uses aggregate cost of capital. It distinguishes between the costs of equity and debt. The literature recommends the determination of the cost of equity based upon the CAPM240. The cost of debt is the actual rate at which the company can raise debt on the capital market. In the case of an IPO, the equity value is the crucial factor because the to be listed stocks have to be priced with an appropriate value. Since the result of the entity approach is the enterprise value, the equity value can be derived from this valuation241. The EV is decreased by net debt. Net debt is the result of interest bearing debt minus cash and cash equivalents. [...]

Under Rule 430A, the issuer has also the option to omit information relating the price of the securities and the offering date when requesting the SEC to declare the registration statement effective. The missing information has to be filed pursuant to Rule 424 in a final prospectus within five days214. 6.2.5 Road Show Prior to effectiveness, the underwriter may market the issue to the financial community, commonly called “road show”. The underwriter and the issuer will travel to potential investors in various financial centers such as New York, London, and Frankfurt promoting the IPO215. Through this stressful part of the IPO, the issuer and the underwriter will meet with analysts, fund and money managers, financial press, media, and other institutional investors such as insurance companies. The selling effort includes group or face-to-face meetings as well as telephone or videoconferences. During the road show, which is done after filing but prior to effectiveness, the issuer can only distribute information included in the preliminary prospectus. The SEC does not permit to distribute any other oral or written information. Moreover, they may place a tombstone216. A violation will delay the going public process. Of interest is that the company is still in the quiet period. 6.2.6 Quiet Period [...]

Once a registration statement is filed with the SEC, its staff will generally inform an issuer within five days of filing whether or not the documents will be reviewed. Registration statements filed by first-time issuer will be assigned to a full and thorough review210. The SEC staff will check for any inconsistency and make sure that the statement complies will all the SEC’s requirements. The SEC does not evaluate the investment worthiness of the company211. If the registration statement appears to afford inadequate disclosure through omission of material information or non-compliance with regulations, the SEC will address all aspects in a letter of comment (also called deficiency letter). Some comments will require changes in the disclosure in the prospectus other may require that amendments be furnished to the staff212. The issuer needs to reply to the comment letter with in 20 days. When the SEC considers that it has received a satisfying response it its comments, it advises the registrant that it is ready to declare the registration statement effective. Typically, the registration statement does not contain the offer price. The underwriter and issuer agree on the size and price of the offering after the subscription period213. The information is incorporated in an amendment to the registration statement, commonly called price amendment. The issuer requests the SEC to declare the issue effective upon filing of the amendment on the following day when the market opens. [...]