A flurry of initial public offerings (IPOs) has marked the year 2021. In fact, 2021 is set to be the biggest year for IPO proceeds ever. Observers estimate there will be 375 companies that go public in the United States this year, raising approximately $125 billion.
The process before a company’s initial public offering is complex and involves months of intensive business and legal work. A company must complete many steps before its IPO. Before a company goes public, it files several documents with the Securities and Exchange Commission (SEC). These filings provide disclosures about the company’s business and financials. Learn more about SEC filings for startups here.
Form S-1 Registration Statement
The main document filed with the SEC that is available for public investors is the Form S-1 registration statement. The Form S-1 is a few hundred pages in length and includes comprehensive disclosure about the previously private company.
Despite company-specific differences, the Form S-1 is a fairly standardized document. There are certain sections in a Form S-1 regardless of the company. Some of the sections you will see in a Form S-1 for a company going public include:
- “Risk Factors”
- “Forward-Looking Statements”
- “Our Organizational Structure”
- “Use of Proceeds”
- “Unaudited Pro Forma Consolidated Financial Information”
- “Executive Compensation”
- “Principal and Selling Stockholders”
- “Certain Relationships and Related Party Transactions”
- “Shares Available for Future Sale”
- “Legal Matters”
- “Index to Consolidated Financial Statements”
Use of Proceeds
The “Use of Proceeds” section provides important information to potential investors. As the name suggests, the “Use of Proceeds” section outlines the company’s plan for how they will deploy the capital they raise. The capital raised through an IPO can open the door to new opportunities not previously available to the company. Potential investors will be keen to understand that the company has a plan to allocate those funds in ways that continue to grow the business.
While companies have considerable flexibility for how they use the funds raised from the IPO, there are certain guidelines provided by the SEC. At a minimum, a general outline of the use of IPO proceeds must be provided in the Form S-1. Companies tend to follow common reporting strategies regarding the manner and level of detail of disclosures. Below is an overview of some of the common categories that many companies use the Form S-1 registration statement.
General Corporate Purposes
Given the SEC’s minimum requirement to provide a “brief outline” of the areas in which the company plans to deploy IPO proceeds, companies often state they plan to use the IPO proceeds for “general corporate purposes.” This broad category could encompass allocating IPO funds toward areas such as working capital, operating expenses, and capital expenditures. It enables companies to keep their more detailed strategy private and provides flexibility as plans evolve over time.
Research and Development
Another common category for the use IPO funds that companies specify in their “Use of Proceeds” section is for research and development. Companies often include a description of how IPO proceeds will contribute to developing new products or services. Some companies opt to describe specific projects while others keep the description of development efforts open-ended.
Use of Proceeds for Future Acquisitions
The allocation of IPO proceeds towards potential future acquisitions is also commonly mentioned. Companies often use a more generalized statement to refer to an acquisition as a possibility, rather than revealing the specific company to be acquired.
The use of IPO proceeds to pay off of existing debt can be beneficial to a company, but it is often scrutinized by investors. Repaying existing debt could help the company be released from restrictive loan covenants or lower their interest payments.
Use of Proceeds Statement: Real-World Examples
For illustrative purposes, here are a few examples of Use of Proceeds statements from the Form S-1 registration statements of publicly listed companies.
- Affirm Holdings, Inc. Use of Proceeds Statement: “We intend to use the net proceeds for general corporate purposes, including working capital, sales and marketing, engineering and technology, and corporate development.”
- Airbnb, Inc. Use of Proceeds Statement: “We currently intend to use the net proceeds from this offering for general corporate purposes, including working capital, operating expenses, and capital expenditures. We may also use a portion of the net proceeds to acquire or make investments in businesses, products, offerings, and technologies, although we do not have agreements or commitments for any material acquisitions or investments at this time.”
- Uber Technologies, Inc. Use of Proceeds Statement: “We intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses, and capital expenditures. We may also use a portion of the net proceeds to acquire or make investments in businesses, products, offerings, and technologies, although we do not have agreements or commitments for any material acquisitions or investments at this time.”