BCP Business & Management BMMFT 2022

Volume 37 (2023)

Determinants of Successful IPOs in the US Market

Qi Jia*
School of Business, Monash University, Melbourne, Australia
*Corresponding author: [email protected]
Abstract. This paper will discuss the impact of internal and external factors on the IPO process.
Primarily aimed at discussing the impact of Investment banks, Regulator Agencies, Company
Executives and Other Financial Intermediaries on the IPO process. As regulators' rules change,
companies and financial intermediaries need to respond in a timely manner to ensure successful
IPOs. On the other hand, trusted financial intermediation and stable company management will help
companies in preparing for IPO more smoothly. Investment banks will guide companies in choosing
the right markets and act as a bridge between other financial intermediaries to ensure a smoothly
running IPO. Other financial intermediaries such as law firms and accounting firms help companies
improve their legal and financial information to meet the requirements of regulators. After the IPO,
companies also need investment banks to help them issue securities, and law firms and accounting
firms to guide companies to complete corporate governance standards such as statements.
Keywords: IPO; investment bank; regulatory agencies; company executives; other financial
Intermediaries.

1. Introduction
Since the 20th century, the financial system of the United States has begun to develop gradually,
and today it has grown into the world's oldest, most complex and most developed financial system.
By the end of 2021, more than $23 trillion worth of assets were in the American financial system [1].
From investment to insurance, almost everyone takes advantage of the financial services industry in
some way, and according to statistics, the insurance and financial services industry accounts for $1.5
trillion or 7.4% of the total GDP of the United States by 2021, and about 6.6 million Americans are
employed in the financial and insurance industry [2]. In 1990, Carter and Manaster mentioned that
for any company, the first time for a private company to obtain money through the public stock market
is IPO (Initial public offering) [3]. In 2002, Ritter and Welch discovered by analyzing data from a
financial point of view, companies choose an IPO because they seek to generate capital for the
business and establish an open market so that founders and other shareholders can eventually convert
part of their value into cash, and from a non-financial perspective, the comapny may be doing it to
increase publicity [4]. The first public offering by a North American bank in the United States
occurred about 1783. In 2021, a total of 1,073 companies completed IPOs in the United States, raising
a total of $317 billion [5]. As of July 2022, Alibaba Group Houlding, which was the largest IPO ever
and appeared on NYSE as a listing in 2014, raising nearly $22 billion, and Visa went public in 2008
with $4 billion and ranked second [6, 7]. The success of an IPO is definitely not achieved by one
party's efforts, and likewise, an IPO can fail due to many factors. In 2007, Demers and Joos mentioned
a factors that may cause an IPO to fail include, but are not limited to time variables, accounting-
related variables, market variables, information intermediaries, issue stock price and company age
[8]. This article will discuss the impact that investment banks, regulators, corporate executives, and
other financial intermediaries have on the corporate IPO process.

2. Investment Bank
When a privately held business decides to conduct an IPO, it needs the help of some financial
institutions to complete it. Investment banks will be the best helpers for a business when it comes to
IPO. Investment banks are financial firms that primarily handle mergers and acquisitions, corporate
restructuring, bond issuing, underwriting, trading, and investment banks are also the primary financial

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intermediaries in the capital market. Before 1933, there was no explicit provision in the United States
that required only investment banks among financial institutions to sell securities. Mentioned in the
Morgan consortium books before 1933, the United States did not clearly demarcate the boundaries
between commercial banks and investment banks until 1933, when Democratic Senator Carter Glass
and Rep. Henry F. Kennedy Jr. B. Steagall's Glass-Steagall Act would completely separate
commercial banks from investment banks [9]. The role of investment banks is to help companies
successfully complete IPOs and issue shares, and investment banks also provide underwriting.
Investment banks' pre-issuance and underwriting responsibilities in corporate IPOs include IPO
counseling, due diligence and roadshows. In the process of listing counseling, the investment bank
needs to be responsible for the progress management of the entire project, formulate the timetable,
coordinate with the intermediaries, be responsible for solving various unexpected problems, and help
the enterprise establish a good system in all aspects so that it can be better listed. In the IPO, the
investment bank also assumes the responsibility of the sponsor, according to the regulations, the
sponsor needs to perform a series of due diligence duties, so it needs to conduct financial due diligence
with the auditor, assist in making the company's profit forecast, model the company's financial
situation, and understand the internal control situation; At the same time, they also have to due
diligence on the company's operations and laws together with lawyers, such as visiting the company's
main place of business and conducting interviews with management. As a very significant
promotional event before a company issues shares, it is arranged by underwriters in order to introduce
more investors to the issuer's situation and thus understand their investment intentions. Investment
banks are required to continuously visit potential investors in various places during the roadshow and
assist issuers in lobbying to enhance their investment confidence.
Before a company goes public, investment bank need to prepare a prospectus. The Securities and
Exchange Commission must receive a prospectus, which is a binding legal document that provides
comprehensive information on investments marketed to the general public (SEC). The prospectus is
open to all investors to assist investors in making more knowledgeable investing choices, as it
includes a plethora of pertinent details on the investment or security. Prospectus contains a succinct
explanation of the history and firm’s financial data, also include business name that issued the shares
and the total shares outstanding issued, and the underwriting banks' names and financial companies.
On the other hand, investors can be informed of the risks associated with investing through the
prospectus and can further determine whether the business is promising in through the company's
financial situation. For example, the raw data in Table 1 comes from Apple's annual report.

Table 1. Valuing Apple's current stock price based on the DCF valuation method
Years 2021 2022 2023 2024 2025 2026
Dividend 0.22 0.4995 1.1340 2.5747 5.8456 13.2719
Growth rate 127.04% 127.04% 127.04% 127.04% 127.04%
Dividend payout Plowback
15.20% ROE 149.81% 84.80%
ratio ratio
Growth rate 127.04% rf 1.49% re 31.97%
rm 26.89% β 1.2
Terminal growth Dividend for Price for
5% 13.9355 51.6705
rate 2027 2026
Intrinsic value $20.30

Since Apple is a leading company in the US IT industry, future sustainable expansion of the
business should remain at a level extremely comparable to that of the whole sector. Therefore, the
US IT industry's terminal growth rate was selected as the terminal growth rate. By analyzing the
financial data in Apple's annual report, after calculation, you can get Apple's financial data, such as
ROE, Plowback ratio, growth rate, etc. The calculation shows that Apple's intrinsic value is $20.3 per
share. Assuming that when Apple's stock is worth $22 per share, investors will not consider buying

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Apple stock and choose to sell it. Investors can also value stocks by analyzing the financial data in
the company's prospectus. There are many valuation methods, such as the price-to-earnings ratio
valuation method, PEG valuation method, DCF valuation method, etc.
After the company is listed, the issuance and underwriting of shares will be an extremely important
part. Only when a company's stock is successfully sold and appreciated can it represent that the
company's listing financing is successful. An investment bank, as an underwriter, is the only financial
institution entitled to sell securities. The underwriting process is in wherein an investment bank first
purchases or underwrites the issuing entity's securities before putting them up for sale. In return for
their services, the underwriters will get a premium, ensuring that the issuer of the securities can raise
the necessary funding.

3. Regulatory Agencies
If a company wants to IPO, it must be checked by a regulator, and the company can only complete
the IPO if the regulator believes that the company is eligible. In United States, there are two biggest
stock exchanges which is NYSE and NASDAQ, have different listing conditions and regulatory
requirements. The NASDAQ is divided into three different tiers, each with its listing requirements.
Any business that wishes to be listed on the NASDAQ must fulfill the criteria and carefully abide by
the corporate governance guidelines. The firm has the option to go through an initial listing eligibility
check before submitting a full application. To evaluate if the firm satisfies the digital listing
requirements and whether there are any regulatory concerns, listing eligibility personnel will analyze
public documentation. A formal application is not the same as the first listing eligibility evaluation.
In Table 2 (source: Colonial Stock Transfer Website), companies must satisfy each of at least four
separate financial requirements, with no exceptions to meet the NASDAQ Global Select Market
initial listing criteria.

Table 2. NASDAQ global select market financial standards

Standard 2:
Standard 3: Standard 4:
Financial Capitalization
Standard1: Earnings Capitalization Assets with
Requirements with Cash
with Revenue Equity
Flow
5315(e) and 5315(e) and 5315(e) and 5315(e) and
Listing Rules
5315(f)(3)(A) 5315(f)(3)(B) 5315(f)(3)(C) 5315(f)(3)(D)
Aggregate in prior
three fiscal years
above or equal to
$11 million, and
each of the prior
Pre-Tax
three fiscal years - - -
Earnings
above or equal to $0,
and each of the two
most recent fiscal
years above or equal
to $2.2 million
Aggregate in
prior three
fiscal years
Cash Flows - above or equal - -
to $27 million,
and each of the
prior three

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fiscal years
above or equal
to $0
Average above
Average above
or equal to
or equal to $850
Market Cap - $550 million $160 million
million over
over prior 12
prior 12 months
months
Previous fiscal Previous fiscal
year above or year above or
Revenue - -
equal to $110 equal to $90
million million
Total Assets - - - $80 million
Stockholders’
- - - $55 million
Equity
Bid Price $4 $4 $4 $4

In Table 3 (source: Colonial Stock Transfer Website), companies that want to meet the NASDAQ
Global Select Market initial listing criteria need to satisfy the following liquidity criteria.

Table 3. Liquidity requirements

Round lot shareholders or Total
Market value of publicly
shareholders or Total Publicly
Liquidity held shares or Market value
shareholders and average Held
Requirements of publicly held shares and
monthly trading volume over past Shares
stockholders’ equity
twelve months
IPOs 450 or 2,200 1,250,000 $45 million

In Table 4 (source: Colonial Stock Transfer Website), companies must fulfill all the requirements
for at least one of the four original NASDAQ Global Market listing criteria listed below.

Table 4. NASDAQ Global Market standards

Total Assets/
Income Equity Market Value
Requirement Total Revenue
Standard Standard Standard
Standard
5405(a) and 5405(a) and 5405(a) and 5405(a) and
Listing Rules
5405(b)(1) 5405(b)(2) 5405(b)(3) 5405(b)(4)
Income from continuing
operations before income
taxes (in latest fiscal year or $1 million - - -
in two of last three fiscal
years)
Stockholders’ Equity $15 million $30 million - -
Market Value of Listed
- - $75 million -
Securities
Total Assets and Total
Revenue (in latest fiscal year $75 million and
- - -
or in two of last three fiscal $75 million
years)
Publicly Held Shares $1.1 million $1.1 million $1.1 million $1.1 million
Market Value of Publicly $8 million $18 million $20 million $20 million
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Held Shares
Bid Price $4 $4 $4 $4
Shareholders (round lot
400 400 400 400
holders)
Market Makers 3 3 4 4
Operating History - 2 years - -

In Table 5 (source: Colonial Stock Transfer Website), companies must meet each criteria for at
least one of the three criteria below to meet the NASDAQ Capital Market initial listing criteria.

Table 5. NASDAQ Capital Market standards

Market Value of
Equity Net Income
Requirements Listed Securities
Standard Standard
Standard
5505(a) and 5505(a) and 5505(a) and
Listing Rules
5505(b)(1) 5505(b)(2) 5505(b)(3)
Stockholders’ Equity $5 million $4 million $4 million
Market Value of Publicly Held Shares $15 million $15 million $5 million
Operating History 2 years - -
Market Value of Listed Securities - $50 million -
Net Income from Continuing
$750
Operations (in the latest fiscal year or - -
thousand
in two of the last three fiscal years)
Publicly Held Shares $1 million $1 million $1 million
Shareholders (round lot holders) 300 300 300
Market Makers 3 3 3
Bid Price OR Closing Price $4 $4 $4
$3 $2 $3

In Table 6 (source: Colonial Stock Transfer Website), companies must meet one of the following
financial criteria to meet the New York Stock Exchange initial listing criteria.

Table 6. New York Stock Exchange financial standards

Closed-end
II: Global Business
Real Estate Management
Market Development
Financial I: Earnings Test Investment Investment
Capitalization Companies
Standards Rule 102.01C(I) Trusts Rule Companies
Test Rule Rule
102.05 Rule
102.01C(II) 102.04B
102.04A
Aggregate for last
three fiscal
years >=$10million;
Adjusted Each of the two
Pre-tax most recent fiscal - - - -
Income years>=$2million;
Each of the prior
three fiscal
years >$0
Global
- $200 million - - $75 million
Market Cap
Stockholders' - - $60 million - -
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Equity
Market
Value of See chart See chart
See chart below $60 million $60 million
Publicly below below
Held Shares
Market
Distribution
Value of
Standards Publicly held Minimum
Shareholders Publicly
Rule shares Share Price
Held
102.01A-B
Shares
IPOs 400 round lot 1.1 million $40 million $4

Thus, according to the criteria of the different markets in the table above. Investment banks will
coach companies to help them find the most suitable market. At the same time, enterprises will also
make some suggestions to enterprises according to market standards to help enterprises meet
standards. Therefore, it takes 1-3 years for a business to prepare for an IPO, mostly because the
financial situation of the company does not meet the market standards.

4. Company Executives
In the process of the company's IPO, executive leadership and the company's board of directors
must work together to support the efforts of financial institutions. The involvement of senior
management is often required when making strategic decisions or setting the tasks of a company's
business units. In the overall process of the IPO, senior management needs to deploy the company's
strategic objectives and ensure that the company's development always meets the requirements of
listing on the stock exchange. Besides, financial institutions often require the cooperation of senior
management when conducting due diligence or when enterprises need to provide legal and financial
documents. The senior management team's makeup, quality, and reputation are crucial factors in the
enterprise IPO process. Better and more prominent executives will be a reliable signal to
communicate the value of an IPO to investors. Academics Cohen and Dean found in a 2005 study
that the level of corporate management, such as the management experience, experience and age of
executives, will directly affect the price reduction level of IPOs [10]. It is worth mentioning that the
educational experience of the executive team and the level of education and culture will indirectly
enhance the attractiveness of the enterprise. For some companies, there are some problems in the
deployment of the company's strategic goals, and IPO listing has become the core goal of the company,
moreover, the company's long-term development goal is quite hazy. In this case, if there is a problem
with the company's IPO progress, or if the IPO is forcibly suspended, it will have a negative impact
on the executive team. The top management team leaving the firm and stealing employees from the
rival company once the listing is abandoned would worsen the team's disintegration. As a result, one
of the key factors in determining whether a firm can successfully execute an IPO is the team's stability.
To do this, businesses should develop a logical understanding that going public is not the end of the
road for the firm, but rather a significant step in that direction. Second, companies should build a
long-term vision that is recognized by their employees, and only when the executive team sees the
future of the company, will they be willing to work hard for it for a long time. On the other hand,
compensation management is also a core element that enterprises need to pay attention to, stable and
good salary structure, long-term incentives and short-term incentives, can ensure the stability of
executives.
A number of SEC and stock exchange regulations must be followed by the board of directors of a
public business to ensure their independence and competency. The boards of directors of most private
companies do not meet these criteria, so boards need to plan ahead to meet the conditions for a
company's IPO. First, some private firms have a board structure that is rather loose, and other

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corporations have a board of directors that does not include mostly of independent directors. or
unbiased committees. As a result, most businesses that want to curry out an IPO have to enlist a few
or more additional newly appointed directors who satisfy the criteria for independence and expertise.
Second, exchanges and SEC rules require public companies to establish the audit committee must
include three independent directors at a minimum who satisfy the higher independence standards for
individuals on the audit committee set out by the SEC. Each Audit Panelist must be capable of
comprehending and reading basic financial statements and possess a working understanding of
finance. A participant on the audit committee must be knowledgeable in fiscal management or
accounting to serve on the NYSE, and NASDAQ requires a member of the Audit Committee to
require financial experience, i.e., accounting or finance-related job experience that is relevant,
professional qualification in accounting, or another background or experience that is comparable
Therefore, the board of directors needs to prepare in advance and comply with all SEC and stock
exchange rules. In this process, financial intermediaries also coach the board.

5. Other Financial Intermediaries

5.1 Law Firms
In the IPO process, the role of law firms is quite important, without a lawyer's legal opinion
company cannot complete the listing, lawyers' work also runs through the IPO listing, in the process
of restructuring, counseling, issuance and listing, the fundamental responsibility of attorneys is to
help businesses list in the safest possible manner. A good law firm can help companies structure
securities and disclose the necessary information to investors. Lawyers need to prepare for all matters
related to the law for IPO listing, including the formulation of the listing plan for the previous legal
matters, due diligence, restructuring, restructuring, declaration, issuance of legal opinions and
amendment opinions. Law firms can also assist in drafting prospectuses and other documents required
by the SEC. It is worth noting that the core of the equity, assets, business restructuring and other
sectors of the enterprise is the legal treatment of finance and assets, in which lawyers may appear in
various capacities such as asset managers, legal counsel, and creditors' clients. Therefore, the duties
of a lawyer include managing the assets of the enterprise, providing legal counsel services,
investigating and grasping the assets and financial status of the enterprise, and sometimes filing or
appearing in court at the request of the client on related creditor and debt disputes. Lawyers may also
act as lawyers for employees of enterprises or relevant tax attorneys to handle labor disputes and tax
disputes. Ultimately, the law firm advises its clients on the legal liabilities they incur, especially those
arising from becoming a listed organization. Therefore, hiring the right team of legal counsel will
help protect companies from many major mistakes during the IPO, such as failing to comply with
SEC regulations.
5.2 Accounting Firms
Accounting firms also play a very important role in the IPO process. Companies that want to IPO
need an accounting firm to issue an audit report on the consolidated financial statements for 3 years
and a financial review report for the most recent quarter before listing. Before the IPO, an accounting
firm can come in to conduct a preliminary financial and taxation health inspection for the enterprise,
and if any irregularities are found, the enterprise shall rectify them in conformity with what the
accounting standards demand. In addition, some accountants will assist the financial department of
the enterprise to unify and straighten out the accounts according to the requirements of the enterprise.
At the same time, the accounting firm will also help the enterprise to establish a reasonable tax
structure. If the company has private placement arrangements before listing, accountants can also
participate in the work. After a company has successfully completed its listing, regardless of which
stock exchange the company is listed on, the company needs an accounting firm to help the company
issue future audit reports. Periodic, semi-annual or annual reports require the signature of auditors to
be effective. Therefore, the end of the IPO does not mean that the cooperation between the company
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and the accounting firm has ended, on the contrary, the cooperation between the enterprise and the
accounting firm has just begun.

6. Conclusion
For any business that wants to IPO, it is not only necessary to have sufficient time to prepare for
legal and financial situations, but also to have stable management and trustworthy financial
intermediaries. Looking back at history, countless examples show that not only internal problems can
lead to IPO failure, but also external problems are very deadly. The success of the IPO must not be
accidental, it took several years of hard work to complete. Over time, the negative impact of the
epidemic era is gradually weakening, the economy is beginning to gradually recover, and the increase
in stock market activity will allow more companies to participate in IPOs in the future. With the
significant increase in the number of investments in the market, this is a great opportunity for loss-
making businesses, as the arrival of a bull market can motivate investors to inject new money into the
company, which will be a good time to turn a profit. This will be a good opportunity for businesses
that remain profitable to accelerate company growth, expand operations, increase company prestige,
motivate employees and attract high-quality employees through stocks. All kinds of reasons are
indicating that in the future, IPOs will be more popular. However, there are also huge challenges
behind the benefits, with the increase in the number of companies applying for IPOs will lead to
greater supervision of companies by regulators. NASDAQ and NYSE have the authority to tighten
the listing regulations. and strengthen the management of a post-IPO code of conduct. The SEC is
likely to become more rigorous in its securities oversight and management work. In this case, both
businesses that want to IPO and financial intermediaries who coach businesses need to be started as
early as possible, especially if it is legal and financially relevant. Having a well-regulated corporate
organizational structure and a sound financial accounting system, and fully evaluating the
requirements for issuance and listing, will increase the chances of a successful IPO.

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