Going public is more than a capital-raising event. It represents a significant transformation in how a company manages financial reporting, internal controls, governance, and investor communications. For technology companies, the process can feel daunting. Companies must prepare for Sarbanes-Oxley (“SOX”) compliance, Public Company Accounting Oversight Board (“PCAOB”) audits, S-1 registration statement preparation, guardrails around the presentation of non-GAAP financial measures, evolving cybersecurity disclosure requirements, and heightened exchange governance expectations, all while continuing to scale the business. With adequate preparation and a runway of at least 24 months, companies can streamline the Initial Public Offering (“IPO”) process, reduce regulatory risk, minimize Securities and Exchange Commission (“SEC”) comments, and enter the public markets with confidence.
Once you decide to go public, start by making sure your audit meets PCAOB standards. If your company was historically audited under private company rules, transitioning early and confirming that the audit firm satisfies PCAOB independence requirements can make the public listing process more efficient. These rules might limit what your audit firm can do, like providing valuations or preparing financial statements. As a result, companies should identify qualified accounting, valuation, and advisory specialists early in the process to address these needs and avoid delays during the audit cycle. Engaging the audit firm and other advisors too late can create significant timeline pressure because PCAOB audits require more rigorous documentation and public-company disclosures.
Experienced securities counsel should be a core component of the IPO team. Legal advisors can help ensure that appropriate governance documents are in place and assist in structuring the board and its committees to satisfy applicable exchange requirements. For example, exchanges such as Nasdaq generally require a majority-independent board and separate audit, compensation, and nominating or governance committees, each subject to specific independence and expertise considerations. Legal advisors can also help determine eligibility for Emerging Growth Company (“EGC”) status and develop an appropriate registration strategy. Following completion of the audit, companies often benefit from pursuing a confidential SEC review before publicly filing the registration statement, as SEC questions and comments may result in material revisions to the filing.
Companies should establish and document a robust internal control framework over financial reporting while ensuring that key accounting and reporting processes are formally documented and consistently applied. Although EGCs may qualify for certain SOX compliance exemptions, implementing and documenting controls early can reduce the risk of control deficiencies or material weaknesses that would ultimately require investor disclosure.
We often see the same issues come up during the audit process as startups work to become public companies. These include:
Many organizations underestimate the level of rigor required to document, evaluate, and maintain an effective internal control environment. Delays in implementing formal policies, procedures, and supporting documentation can result in control deficiencies or material weaknesses within the financial reporting process. Incomplete process documentation can also create audit delays and inefficiencies, increase audit costs, and contribute to additional SEC comments.
Ideally, your startup has completed prior audits in connection with seed, series, or debt financing rounds and has historical financial information that is ready for review. If not, the company should maintain organized supporting documentation for all periods subject to audit, including trial balances, general ledgers, financial statements, and accounting position papers addressing complex transactions. When internal resources are limited, external technical accounting specialists can assist with technical memoranda, financial statement preparation, and disclosures that comply with GAAP and SEC requirements. Areas involving significant judgment, including business combinations, equity-based compensation, convertible instruments, intangible asset valuation and impairment assessments, often require specialized accounting and valuation expertise. Identifying these matters and engaging qualified specialists early can help expedite the audit and reduce avoidable cost overruns.
An IPO benefits companies that view compliance as a core capability. By allowing your teams enough time to prepare, you’ll enter the public markets with better controls, clearer disclosures, and the trust of investors you need to grow.
For more information on this topic, please contact a member of our team.
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