Startup SEC Compliance - SEC Startup Funding - Founder Advice (2024)

Author Rick Smetanka Leave a Comment

As an entrepreneur, you are going to be looking for funding in many different places, from family and friends to private equity firms and investment banks. Even reality shows featuring angel investors and crowdfunding platforms could make it to a startup’s short list of possible funding sources, especially in the development and pre-revenue stages when cash is the scarcest.

During this period – which, if all goes according to plan, is just the first inning of what will be a full and exciting baseball game – the last thing on your mind is going public with an IPO. To stay with the baseball analogy, that would be like getting your closer warmed up during the national anthem.

As far off as that IPO might seem, though, it is never too soon to consider SEC compliance. Even if the current leadership team has no plans to take the company public, that doesn’t mean that private investors will see it the same way. All it takes is one member of the VC team to imagine a hypothetical IPO as part of his or her inevitable exit, and the case is proven for SEC compliance.

Ultimately, in the eye of an investor, financial statements that are up to the standards of the SEC will be more credible – and just easier to exit from down the road – than those that are not. In that sense, the need for SEC compliance can be greater during the development stage than later on when capital-raising is less of a concern.

Getting There

To maximize enterprise value, financially savvy companies understand what it takes to be SEC-ready. A potential IPO or an acquisition by a public company may offer attractive valuations and other benefits when compared with a private equity investment or an acquisition by a privately held company.

It is critical to watch out for financial “blind spots” during this endeavor. Too many startups have too much to fix and not enough time to do it when the IPO window opens.

Here are four tips for making your business SEC compliant and highly investible.

• ‘Upskill’ Your Company: Before, during and after an IPO will require organizational and technical skills that may not currently exist in your organization. CFO, controller, SEC reporting manager and audit committee chair are some of the most critical positions. Previous accounting and reporting decisions will need to be re-aligned (revenue recognition, income taxes, and debt/equity instruments), and corporate governance models will need to be implemented (board constitution and subcommittees such as audit and compensation).
• Assemble Your Dream Team: The success of an IPO depends largely on your team of advisors and its collective abilities to work together, efficiently and with your best interests at heart. Key advisors that will be required in your line-up include SEC counsel, independent auditor, underwriter, financial printer and investor relations.
• Build Infrastructure: At times, the process to take your company public will seem like a sprint, but it is important to remember that being public is a marathon. Your company will need to build consistent, disciplined processes and procedures to ensure timely, reliable and accurate financial reports. Additionally, new policies (whistleblower, code of conduct), new charters (boards and subcommittees), new internal controls, new stories and new behaviors will need to be developed and cultured.
• Know what you’re in for: Benefits associated with being public are many, but so are the negatives. As great as it seems to have access to capital, the ability to use stock as currency and increased visibility, prestige and valuation, there are also costs with being public, potential liabilities and risks of insider trading.

All of these areas should be understood from the beginning of the startup journey, and the best way to keep your entrepreneurial eye on the ball is to partner with an experienced CPA who specializes in SEC readiness and compliance.