Selling shares on a stock exchange helps you raise capital, plus it's a mark of prestige. You can't simply start selling stock in your company, call up NASDAQ or NYSE and demand a listing. First, come the legal steps required for an initial public stock offering (IPO). Then you have to navigate the exchange process before you finally start trading.
Going Public on a Stock Exchange
To begin the journey to a stock exchange listing, file a registration statement, Form S-1, with the Securities and Exchange Commission. The statement includes the prospectus, the document you offer to anyone looking to buy your shares. The prospectus has to accurately describe your business operations, financial health, management and risk factors. It also includes audited financial statements.
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The SEC also requires added financial details, outside of what you put in your prospectus. The SEC can reject your registration if it thinks your information is inaccurate, misleading or incomplete. New, smaller companies can use a streamlined SEC process to file their registrations.
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Exchange Listing Standards
Like exclusive clubs, the major stock exchanges don't accept just anyone. NASDAQ and the New York Stock Exchange, for example, both have listing requirements your company has to meet. These include your initial stock price, number of shares, number of shareholders and total market value.
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After you start trading on an exchange, you have to meet less stringent standards to stay on the board. Otherwise, the exchange can drop your stocks.
Getting on the Board
Each stock exchange sets its own standards. If you can't qualify for one board, it's possible another will welcome you. The NYSE, for example, has a separate market, NYSE American, for companies that aren't large enough for the big board.
Once you settle on the right market, you pick your ticker symbol, the shorthand for your company. NYT, for example, stands for the New York Times. You need to choose a symbol that meets your board's rules, the SEC requirements and doesn't duplicate anyone else's symbol. There's also a marketing theory that investors respond better to symbols that look like words they can pronounce: SIRP is more attractive than SRP, for instance.
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Finding an Underwriter
You must employ an underwriter to act as the intermediary between your company and investors. Underwriters function as the risk experts of the financial world, and investors depend on them to determine whether it's worth taking a business risk.
Before you can list your company on the stock market, your underwriter must agree to assume the risk of buying the whole inventory of stock in your company before selling it to the public. This commitment takes the form of an underwriting agreement. After you've settled your underwriting agreement and the U.S. Securities and Exchange Commission has investigated your company, the underwriter drafts a prospectus to show to potential investors in an attempt to drum up excitement.
Apply to the Exchange
Once you have your prospectus and your ticker symbol, you apply to the exchange or exchanges you want to be listed on. Along with the application form itself, you'll need a boatload of added documentation:
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- A letter from your underwriters confirming you're able to meet the listing standards
- A confirmation your firm meets the board's shareholder requirements
- A listing agreement completed by one of your executive officers
- A copy of the corporate charter and bylaws
- A certificate from the state where you're chartered, saying your business remains in good standing
When you deliver those and other papers with your application, you should be on your way to selling shares on the exchange.
References
- SEC: What Is a Registration Statement?
- Inc.: IPO Basics: A Road Map
- SEC: Listing and Delisting Requirements
- NYSE: National Market System Plan
- NYSE: Get Started
- New Yorker: The Secret Science of Stock Symbols
- NYSE: Checklist for Supporting Documents
- Investopedia: Underwriter
- Investopedia: What Does the Underwriter Do in a New Stock Offering?
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Resources
Tips
- Forms and documents required in the registration process with the SEC can be found at SEC.gov. Once your initial registration statement is filed, the SEC will send a request of information and forms to be completed to fulfill the disclosure requirements. Most forms are found under the Electronic Data Gathering Analysis and Retrieval system, EDGAR, on the SEC website.
