The “File, Then Sell Strategy,” for Emerging Growth Companies

When rumors start swirling that a company … an emerging growth company (“EGC”) … is thinking about going public, two groups often come running to call on EGC management. First to the front door are the investment bankers who want to chaperone the EGC through the IPO process and represent it afterwards on secondary offerings, acquisitions and the like. But, right behind the bankers are often strategic acquirors. (Also institutional investors who relish participating in five or six bridge rounds with exits on the horizon given the effect of the time value of money on IRRs.)

Why potential acquirors? Because larger players in the sector know that, once an EGC is public, it will have more resources to compete with the strategics for customers and partnerships. It will have the same currency … publicly traded stock … as the strategies have to use in acquisitions, perhaps commanding the attention of the “Street” as the new golden child … and, perhaps most importantly, the EGC, public, will likely be more expensive for them to acquire.

Thus, preparing for an IPO can often be the best way to smoke out a preemptive bid from the perfect strategic player. The downside scenario isn’t too bad either the EGC might just have to go public!

The “file, then sell” strategy, is a good deal easier to undertake by virtue of the reforms (now in place) to the public floatation process in the U.S. courtesy of Title I of the JOBS Act … the so-called On Ramp IPOs. The good news is that the issuer and its counsel can climb a significant distance up the mountain on the way to the summit without spending hundreds of thousands of dollars in an effort to prove to the marketplace that the IPO process has been seriously undertaken. The issuer can conduct a road show (although it cannot be called a road show) by assembling a group of institutional investors; hiring for this purpose an investment banker and “testing the waters” by explaining the On Ramp strategy to the assembled group for purposes of gauging their reactions … an IPO reality check, in effect. The attendees are not bound, of course, speaking out at the road show is not the equivalent of the placement of an order; but it is useful to get that kind of information in the hands of any issuer before it undertakes to engage counsel to draft a registration statement and begin the process of responding to SEC staff comments. Indeed, if one or more of the institutions invited to the gathering is a potential acquiror of the issuer, so much the better.

Moreover, if further evidence is needed to convince the market place that a public floatation is serious, the issuer can in fact engage counsel to draft a registration statement and file the same confidentially with the SEC. As far as the general public is concerned, the issuer’s vendors and customers for example, there is no need to publicize that an IPO is being essayed until the process has been vetted by the SEC, the staff’s comments absorbed and the effective date of the IPO looming within a few weeks after public circulation of the prospectus and registration statement. If the deal is called off before “printing the reds” (as we say) it need not be a matter of public record that the issuer climbed halfway up the mountain and then turned around and climbed back down again. And, by filing the registration statement, albeit confidentially, that fact can circulate privately amongst the potential acquirors as proof the game is afoot. Indeed, if proposals in the interim are received by the board to acquire the EGC, due diligence will have been done by counsel and company management in preparing what is intended to be a complete disclosure of what the company is all about.

Joseph W. Bartlett, Special Counsel, McCarter & English, LLP

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