Navigating the Complexities of Conducting a Tech IPO/ICO

Navigating the Tech IPO is a complex process that requires extensive planning and preparation. From registering with the Securities and Exchange Commission (SEC) to protecting sensitive information, many technology companies find the process of going public to be overwhelming. But, going public is a significant milestone for any technology company, as it allows them to raise the necessary capital for growth and expansion. In this blog, we will dive into the complexities of conducting a Tech IPO/ICO and provide guidance on how to navigate the process successfully. Whether you’re a company considering going public or an investor looking to invest in a technology company, this guide will provide the information you need to navigate the Tech IPO process with ease. valuable insights into the process.

Navigating the tech IPO

The SEC defines an Initial Public Offering (IPO) as when a company first sells its shares to the public. [1] Technology (Tech) companies distribute IPOs to raise the funding necessary for growth. Tech companies have raised approximately $4.3 billion in funding via IPOs by the third quarter of 2018.[2]

The process of starting an IPO is a long exhaustive process that involves several layers of intense diligence by investment banks and lengthy filings with the SEC. The SEC requires certain corporate information to become open to the public.[3] During the initial phase of going public, the company and its financials must be prepared to withstand public scrutiny. An investment banker performs extensive due diligence to prepare the company’s books for going public, to underwrite the potential IPO, and to determine the value of the proposed IPO.

The Securities Act of 1933 requires companies to register securities sold on the U.S. market with the SEC. [4] These companies must file a registration statement (From S-1) with the SEC prior to going public.[5] A Preliminary Prospectus is filed as the first draft of the registration statement which includes the pertinent information found in the due diligence process. Once the preliminary prospectus becomes effective, the company will then file a final prospectus to include the IPO’s price range and amount of stock issued.

When conducting an IPO, a tech company must consider that it might make sensitive information public. They must include the value of their Intellectual Property in the analysis to determine the price of their IPO. This information may consist of trade secret information and/or expiration dates of patents. By releasing this information, the company is now open to various IP-related issues which can put a strain on the IPO. Tech companies with considerable IP investments must take the necessary steps to prevent IP issues from arising, pre and post-IPO.

Tech ICO

These Tech companies may also place Initial Coin Offerings (ICO) on the market to raise capital. Similar to IPOs, the ICO process involves registering with the SEC. However, ICO generally does not fall under the SEC’s jurisdiction over securities.[6] Therefore, filing a registration statement with the SEC is not required. Companies issuing ICO’s file a Regulation D exception which will allow them to trade their ICO without registering as a security.

The first step to issuing an ICO is to create a product and a token. The token/coin will allow the purchase of interests in the product.[7] A company publishes a detailed description of its token and product on a “White Paper” to inform the market of the Initial Coin Offering (ICO).

How to resolve Tax basis concerns with multiple levels of investors for Tech M&A

Technology companies rely heavily on investors to fund their operations. In general, a company has three levels of investors: 1) Founders, 2) Employees, and 3) outside investors. When participating in an M&A transaction, an investor’s tax liability on the sale of company stock is determined by their basis in the stock. Shareholders must approve the proposed deal in order to finalize it. To maximize returns and prevent dissatisfaction among shareholders, companies should establish individual bases for investments at the beginning of the process.

IT business founders and key staff typically receive restricted shares in exchange for stock. “Restricted stock” refers to shares of stock whose ownership is not fully vested unless certain conditions are met. When an investor’s interest vests, the stock’s value is taxed as ordinary income. Upon completion of an M&A transaction, the shares will be taxed at the capital gains rate. Their basis will be equal to the FMV at the time of vesting.

Founders and employees can choose when to value their basis under Section 83(b) of the Internal Revenue Code – either at the time of issuance or the time their interest vests. Founders and employees must make the decision to value their basis under Section 83(b) of the Internal Revenue Code within thirty days of the initial stock issue. By making this election, a founder or employee shareholder can choose to determine their tax basis at the date of issuance, which can provide the greatest tax benefit when the shares are sold in an M&A transaction.

IRS Guidelines

The IRS provides the following illustration as help.

“Company A is a privately held corporation and no stock in Company A is traded on an established securities market. On April 1, 2012, in connection with the performance of services, Company A transfers to E, its employee, 25,000 shares of substantially non-vested stock in Company A.

In exchange for the stock, E pays Company A $25,000, representing the fair market value of the shares at the time of the transfer. The restricted stock agreement provides that if E ceases to provide services to Company A as an employee prior to April 1, 2014, Company A will repurchase the stock from E for the lesser of the then current fair market value or the original purchase price of $25,000.

E’s ownership of the 25,000 shares of stock will not be treated as substantially vested until April 1, 2014, and will only be treated as substantially vested if E continues to provide services to Company A as an employee until April 1, 2014.

On April 1, 2012, E makes a valid election under § 83(b) with respect to the 25,000 shares of Company A stock. Because the excess of the fair market value of the property ($25,000) over the amount E paid for the property ($25,000) is $0, E includes $0 in gross income for 2012 as a result of the stock transfer and related § 83(b) election.

The 25,000 shares of stock become substantially vested on April 1, 2014, when the fair market value of the shares is $40,000. No compensation is includible in E’s gross income when the shares become substantially vested on April 1, 2014. In 2015, E sells the stock for $60,000. As a result of the sale, E realizes $35,000 ($60,000 sale price – $25,000 basis) of gain, which is a capital gain.”[9]

Important tax considerations for a Tech M&A

The Tax Cuts and Jobs Act brought about the most significant changes to U.S. tax policy in recent memory. Tax considerations play a major role in determining the value of a Mergers and Acquisitions (M&A) transaction. For Technology (Tech) companies engaged in M&A to assess the impact of the TCJA, they must take into account the changes in the rules for 1) Net Operating Losses (NOLs), 2) the Research and Experiment tax deduction, 3) fringe benefits, 4) the Global Intangible Low Tax Income (GILTI), and 5) the new limitations on interest deductions.

Deferred tax benefits, such as NOLs, increase the value of the transaction by allowing the acquiring business to benefit from the target’s earlier losses. The Tax Cuts and Jobs Act (TCJA) enables taxpayers to apply Net Operating Losses (NOLs) to prior years by allowing them to carry back NOLs The TCJL prohibits the carrying back of NOLs. A tech business with unstable cash flow and operational capital may use NOLs as an inducement to facilitate the sale. The increased restrictions on NOLs may result in a price reduction.

By their very nature, IT companies invest extensively in research and experimentation (RE). These activities incur tax-deductible expenses. TCJA changes research and experimentation expense deductions to capitalization and amortization over 5-15 years. This will have a considerable influence on the tax situation of technology businesses with substantial investments in real estate activities.

The TCJA disallows the deduction of employee fringe benefits and perks. These activities are classified as entertainment, amusement, or relaxation, and they provide transportation advantages. In the present employee-friendly climate, technology companies are at the forefront of creating employee-friendly settings and perks. Now, IT companies must decide whether to discontinue providing these advantages or absorb the tax burden associated with the activities.

Global Intangible Low Tax Income (GILTI) is a completely novel provision. This provision requires Controlled Foreign Corporation shareholders to incorporate GILTI in their gross income. The provision permits 80% foreign tax credits and an additional GILTI tax levy for corporations with taxable income below a specified threshold. Tech companies in the United States commonly form offshore subsidiaries in countries with no income tax. As such, they are subject to the GILTI tax provision, which can undermine a transaction’s tax ramifications.

Section 163(J) limits interest expense deductions to interest income plus 30% of adjusted taxable income. There is no consideration of permissible deductions for depreciation, amortization, or depletion in the limits. The TCJA modifies and broadens section 163 (j) such that it applies to all businesses, including partnerships. These new restrictions reduce the amount of cash flow a technology business must incorporate in the transaction’s value. [10]

What intellectual property considerations must be made in Tech M&A?

Intellectual property is the tech industry’s lifeblood. Included in intellectual property are patents, trademarks, and copyrights. The primary advantage of mergers and acquisitions for technology companies is that it provides rapid access to new technologies without the need to develop them from scratch. Specifically, Tech businesses engage in M&A activities to get control of the target company’s intellectual property. The value of a target company is directly impacted by the value of its intellectual property.

In order to maximize the value of the transaction, it is essential to evaluate how to protect the IP value during IP due diligence. Consider 1) the credibility of their IP and 2) the branding of their IP to safeguard the value of their IP.

No one will conduct business with an untrustworthy organization. To maintain credibility, it is necessary to have a comprehensive understanding of the target’s IP. In IP-heavy transactions, there is no room for embellishment. Claims of “patented” status when the property is just “patent pending” may make the sale more appealing to prospective buyers. The potential buyer will jeopardize the agreement when they discover the exact status of the patent pending. The purchaser may perceive the target company as untrustworthy for making misleading claims or as unprofessional for failing to discover the patent status during due diligence.

To increase the perceived market worth of IP, it is vital to focus on its branding. As the value of silicone increased, so did public awareness of technology businesses. Brand awareness is an important technique since it can limit or boost the value of intellectual property. Consider Facebook’s attempted $3 billion acquisition of Snapchat in 2013 as a positive example of brand awareness increasing value. At this time, Snapchat had no revenue. Its value was solely on its positive social media reputation and its technologies. During a highly publicized data privacy crisis in 2018, Facebook’s stock price declined by 7 percent. This demonstrates the detrimental impact of public perception on value. [11]

What considerations are made when insuring a tech M&A

The proliferation of the mobile platform drives the expansion of the technology sector. However, the proliferation of mobile platforms puts the IT sector at a significant disadvantage in the fight against cybercrime. Cybercrime was the biggest threat to organizations worldwide in 2017.[12]

Projections estimate that U.S. businesses will incur a cost of $6 trillion as a result of cybercrime by 2021. [13]

Because of the nature of technology, the technology industry is a continual target for cybercriminals. Data breaches and the level of damage they inflict have a significant influence on the bottom line of a business. Cybersecurity insurance provides a buffer against the cost of cyber-attacks, thereby protecting the firm. Insurers assess a company’s security rating when deciding whether or not to insure an M&A transaction.

In order to assess a company’s security score, insurers will evaluate the company’s construction of a security program and crisis management. They will also evaluate the company’s occupancy of data management and access management, protection of their operations and reactions, and vulnerability to security breaches.

[14] Effective cyber security measures can reduce a company’s exposure to risk. Cyber insurance protects a technology company’s deal value by mitigating the risk of cybercrime.









[9] Rev. Proc 2012-29,

[10] Unless otherwise indicated, all IRC section references are to the Internal Revenue Code.





Let's Connect

Skip to content