An initial public offering, or IPO, is the moment a private company first sells shares to the public. This article explains the legal steps behind it in the United States, what the “emerging growth company” label changes for a young technology firm, and how a smaller offering under Regulation A differs.
Why an IPO is a legal process first
The headline events of an IPO, a ticker symbol and a first-day price, come at the end of a long regulatory sequence. According to the US Securities and Exchange Commission (SEC), going public usually means an IPO in which a company sells shares to the public, often to raise capital. Before it can do that in a registered public offering, the Securities Act requires the company to file a registration statement with the SEC.
The company cannot sell the covered securities until SEC staff declares that registration statement effective. That wording matters. Effectiveness is not an endorsement of the company or a judgment that its shares are a good value. It means the required disclosure has been filed and reviewed by staff, so that buyers have information to judge for themselves.
What goes into a registration statement
A registration statement is, in essence, a large disclosure document. Companies describe their business, the risks they face, how they plan to use the money, who runs them and who owns them, and they include audited financial statements. For a technology company, the risk sections often dwell on topics readers will recognize from earlier coverage: dependence on a few large customers, heavy spending relative to revenue, and the way subscription revenue behaves. Those ideas are explained in our guides to burn rate and runway and to the SaaS business model, and they are the numbers a prospective buyer of shares tends to read first.
The document is reviewed by SEC staff, who can ask for changes or more detail, and the company usually revises it more than once before it is declared effective.
What is an emerging growth company?
Congress created a lighter tier of requirements for newer public companies in the JOBS Act of 2012. The SEC describes an emerging growth company (EGC) as one defined in Section 2(a)(19) of the Securities Act that may follow disclosure requirements scaled for newly public companies.
To qualify, according to the SEC, a company must have had total annual gross revenues below $1.235 billion in its most recently completed fiscal year. It also must not have sold common equity under a registration statement as of December 8, 2011. The revenue ceiling started at $1 billion in the statute and is adjusted for inflation, which is how it reached its current level.
The status is not permanent. Per the SEC, it lasts for the first five fiscal years after the company completes an IPO, and it ends sooner if any of these happens:
- Annual gross revenues reach $1.235 billion or more.
- The company has issued more than $1 billion of non-convertible debt over the past three years.
- It becomes a “large accelerated filer,” a category defined in Exchange Act Rule 12b-2 that generally reflects a large public market value.
What does the label actually change?
The SEC lists several accommodations for these companies. They are best read as a table of trade-offs rather than a list of perks.
| Area | Typical public company | Emerging growth company |
|---|---|---|
| Audited financial statements in the IPO filing | Three fiscal years | Two fiscal years |
| Auditor attestation of internal controls (Sarbanes-Oxley Section 404(b)) | Required | Not required |
| Executive compensation narrative | Fuller disclosure | Less extensive disclosure |
| New accounting standards | Follow the standard timeline | May defer certain changes |
| Pre-offer conversations (“testing the waters”) | Narrower | Permitted with qualified institutional buyers and institutional accredited investors |
Each row reduces cost or effort for the company, and each also gives outside readers somewhat less to work with. Two years of audited statements instead of three means one fewer year of history to compare. An internal-controls attestation is an independent auditor’s opinion on whether a company’s financial reporting processes are reliable, and its absence removes one external check. Investors who care about those checks can read the remaining disclosure more closely and weigh the gaps accordingly.
“Testing the waters” simply means sounding out large, sophisticated investors about their interest before committing to a full public process. It helps a company learn whether an offering is likely to find buyers.
A worked example of the revenue test
Consider a hypothetical software company with $400 million in revenue in its latest fiscal year. That is below $1.235 billion, so on revenue alone it could qualify, provided it also meets the 2011 equity-sale condition. Suppose it lists, stays on this path, and its revenue grows 30% a year. After one year, revenue would be $520 million. After two, $676 million. After three, about $879 million, and after four, about $1.14 billion, which is still below the ceiling. After five years, it would reach about $1.48 billion, above the line.
Here the clock, rather than revenue, would decide the end of status in most cases: the five-fiscal-year limit would arrive at about the same moment. The example is illustrative arithmetic, not a forecast about any company. Real revenue is lumpier, and the test is applied to a single fiscal year’s actual figure.
Is an IPO the only way to sell shares to the public?
No. Regulation A is a smaller-scale route that the SEC describes as an exemption from full registration, with two tiers. Per the SEC, Tier 1 covers offerings of up to $20 million in a 12-month period and Tier 2 covers offerings of up to $75 million. For offerings up to $20 million, a company can choose either tier.
Tier 2 comes with conditions. According to the SEC, it requires audited financial statements and ongoing reports, and it limits how much a non-accredited investor may invest. Tier 2 issuers are not required to register or qualify their offerings with state securities regulators, which removes a layer of duplicated review.
The SEC’s compliance guide for the exempt offering framework, which covers amendments adopted on November 2, 2020 and effective March 15, 2021, records that the Tier 2 limit was raised from $50 million to $75 million. The same amendments raised the Regulation Crowdfunding cap from $1.07 million to $5 million, a still smaller route aimed at very young companies.
Regulation A is a poor fit for a company that needs billions of dollars, but it offers a public-facing path for firms that want broader access to investors than private rounds provide. How it fits into the earlier funding steps is covered in our explainer on how startup funding works from pre-seed to Series A.
What changes the day after listing?
The SEC explains that once a registration statement is effective, the company becomes subject to Exchange Act reporting requirements. In practice that means periodic public reports on its finances and business, plus disclosure of significant events as they occur. Companies can also become reporting companies by registering under Section 12 of the Exchange Act without an effective offering registration statement, which shows that the reporting obligation and the act of raising money are legally separate.
For founders, this is the real change. A private company can decide when to disclose results and to whom. A public one answers to a regular calendar, to analysts and to a much larger set of shareholders. Companies built around a single founder or a very small team, a model discussed in our piece on solo founders running software companies, tend to find that the reporting load is a major organizational shift if they ever list.
What is still uncertain?
Several things a reader might expect from an IPO explainer are outside what the SEC pages reviewed here establish. They do not say how many companies will go public in any given period, whether market conditions will favor listings, or how long SEC review takes in a particular case. Those depend on market conditions and on each company’s filing. Rule changes also move: the SEC has proposed and adopted amendments to its offering rules over the years, so figures such as thresholds and offering caps should be checked against the current SEC pages before anyone relies on them.
The SEC pages used here carry their own review dates, with the emerging growth company page last updated on June 24, 2024 and the Regulation A page on November 14, 2024. Thresholds that are adjusted for inflation can change between reviews.
Reading an IPO with the rules in mind
An IPO is best understood as the combination of a disclosure obligation, a status that trims some of that obligation for newer companies, and a market that decides what the shares are worth. The registration statement shows what the company is willing to be held to. The emerging growth label tells a reader which items to expect in lighter form. Regulation A shows that going public is a spectrum rather than a single door. Anyone following a technology listing can use that framework to ask the right questions: how many years of audited results exist, whether internal controls were independently assessed, and how much of the story depends on revenue that has yet to prove durable.
This is general information, not financial, investment, tax or legal advice.
Sources: US Securities and Exchange Commission
