Understand the Impact of Test-the-Waters and ESG Regulations Before Going IPO

Understand the Impact of Test-the-Waters and ESG Regulations Before Going IPO

by Matthew Perreault
January 13, 2023

Is your company considering issuing public stock?

The initial public offering (IPO) landscape is complex, and there are so many questions to consider before you make the jump: Are you prepared to be a public company? Are you comfortable with the transparency required in an IPO process? And, if you do go public, what’s the market’s appetite for your company’s stock?

If your organization is gauging market interest or preparing for an IPO, keeping the following regulations in mind, and weighing the associated compliance costs against the access to capital markets, can help you determine the best path forward.

Testing the Waters

To help encourage more companies to consider public offerings, the Securities and Exchange Commission (SEC) adopted a rule in 2019 that would extend to all companies the “test-the-waters” provision of the Jumpstart Our Business Startups(JOBS) Act . This provision allows all companies that want to gauge market interest in a possible IPO to have confidential discussions with institutional investors before filing a registration statement.

It gives companies contemplating an IPO the opportunity to fix any shortcomings in their disclosures before releasing them to the public — or deciding not to go public after all. Either way, the confidential process protects your company from lengthy scrutiny from investors, the media and competitors.

Imminent ESG Regulation

It’s also imperative for companies contemplating an IPO to consider the environmental, social and governance (ESG) issues that are relevant to their business. Increasingly, organizations are being evaluated according to ESG standards: a set of core values and global standards for economic growth, thriving communities and a sustainable, healthy environment.

Though the extent of future ESG regulation remains to be seen, demand for non-financial disclosures has continued to gain momentum in the investment world and may be mandated at some level in the coming years.

As ESG reporting continues to evolve, the true cost of ESG regulation is yet to be determined. On one hand, better ESG performance is associated with a lower cost of equity and provides shareholders with access to cheaper capital liquidity. On the other hand, the cost of compliance only continues to rise for public companies. First it was a financial statement audit, then came Sarbanes-Oxley (SOX), now ESG looms on the horizon.

How does the heavy cost of regulation balance out against everything else? Will the government provide relief by either making the level of attestation less rigorous or widening the scope of professionals that can perform the attestation? Pre-IPO companies still have more questions than answers when looking at how ESG will factor into the future of their businesses. But implementing robust ESG disclosure practices in the meantime, prior to IPO, can ensure that you’re adequately prepared no matter what regulation lies ahead.

There are many other factors to consider as you decide whether to take your company public. But taking the above regulations into account and testing the waters before you make your final decision can help you navigate a smoother route to IPO.

If you’re considering taking your company public, we can help you through all facets of the process. For more information about how to prepare for your company’s public filing, contact our experts for an IPO readiness assessment.

Stay In Touch

Sign up to stay up-to-date with the latest accounting regulations, best practices, industry news and technology insights to run your business.

Related News and Insights
Risk Mitigation Measures: Navigating Disruption with Confidence
Is your business at risk from unseen dangers?

May 29, 2024 | 12:00 PM - 01:00 PM PT
Changes to the Internal Audit IPPF: What You Need to Know and How to Prepare
Aligning with the revised framework empowers your organization to meet expectations for reliable internal audits.

March 29, 2024
Quiz: How Healthy Is Your Patient Services Ecosystem?
Take a fresh look at your vendor contracts to safeguard compliance and patient outcomes and uncover savings.

March 19, 2024