There are several reasons why a company might consider being publicly traded. Probably the most important is that this provides an “exit strategy” for investors. If an investor puts money into a privately held company, and does not have 51% ownership, he really doesn’t have much. The owner/controller of the company may never provide the investor with an exit strategy: a means of making a profit or even receiving back the initial investment. If the stock trades in a public market, the investor has the ability at any time after his stock is deemed tradable, to sell his stock; hopefully at a profit. By offering the investor a real exit strategy, the company may be improving its chances of raising money.
Another reason a company might consider “going public” is that by structuring the company for eventual tradability, the value of the company itself – the structure without the actual business operation, may be increased. Should the initial business operation not work out as planned, there may still be value for investors including the company founders, because of the attraction provided by a business structured for the public markets.
In the article that follows, we discuss each one of the above ten points in the process of going public in much more detail. Please contact us with questions.
It usually takes a period of time to become publicly traded. That time period can vary from one to several years. There are faster ways of becoming publicly traded, but these ways are generally more costly than the slower process. Actually, a year or two to tradability is not very long, considering the fact that most businesses can take three to five years to become profitable.
In order to become publicly traded at some future time, it is necessary to have multiple equity partners or “shareholders”. This is usually done through an “offering” process. This may be as simple as “private placements” from “accredited investors” over a period of time, or a “private placement memorandum” may be prepared in accordance with one of the governmentally designed exemptions such as those offered under “Regulation D”. Any offering has rules, which must be followed in order to insure eventual tradability. It is important to have knowledgeable assistance in these areas usually from accountants and attorneys familiar with the public process.
Going public “the long way” (which means one or two years) is probably the least expensive way of becoming publicly traded. The actual “hard costs” which are for incorporation, accounting, legal and filing fees can be accomplished for $25,000 or less. There are consultants available, in addition to accountants and attorneys with knowledge and experience in securities, any of which could add an additional $25,000 to $100,000 or more in costs. Keeping the costs down is accomplished by gaining knowledge in the areas indicated over a reasonable time period. Knowledge is indeed power. It can also save a great deal of expense. That’s partly where we come in. What follows is a detailed description of our process for taking private companies public.
Before incorporating it is a good idea to put together a short document describing the company and its structure. This can be titled “Pre-Incorporation Agreement”, or “Founders Agreement”. This document can have a paragraph or two describing the business concept and could also describe how many shares of stock will be authorized, and how many issued and at what price. Most states have an exemption from securities regulation for up to 10 incorporator/founders. If a company is to one day be publicly traded, it is necessary to have multiple shareholders and this provides a good base. Unless the stock is registered for trading, these initial shareholders would wait at least two years before their stock would trade. They are subject to “Rule 144”, a securities regulation that states when and what stock can be traded.
A company can be based in just about any state and some day go public. In the past it has been popular to incorporate in states like Delaware, which specialize in the corporation process. It is important to review the costs of incorporating when there is a potential of being publicly traded. Some states base the price of incorporation (Delaware is such a state), on the “par value” of stock and the number of shares authorized. In recent years many states have opted to incorporate in Nevada, a state with laws considered by many to be friendly to corporations. The type of company, which is generally used to “go public” is a “c-corporation”, the more traditional company as opposed to a regulation-s corp or limited liability corporation. In order to structure for the eventuality of trading, it is good to authorize a substantial number of shares (many companies authorize 75 to 100 million) and to have a very low par value (many companies use a “mil” which equals $0.001).
It is important to keep continuous and complete records on any company, particularly if it may someday be publicly traded. To be complete, a company needs bylaws in addition to the initial incorporation documents, and it should keep a meticulous record of shareholder meetings, corporate resolutions, etc. Reconstructing missing records at a later date is definitely not an easy task. It may be impossible and might be illegal if done improperly. If investors are utilized in setting up a company, it is also necessary to keep track of invested capital, stock issued, loans, withdrawals, etc.
In order to trade, a company needs multiple shareholders and those shareholders need to be well informed before an investment is made. Perhaps the simplest way of acquiring investors is with “private placements” utilizing a subscription agreement. Those who invest in this manner need to be “accredited.” The government offers the definition of accreditation, which usually states an individual that makes a substantial income (usually $200,000 plus per year) or has a net worth in excess of a million dollars–excluding the value of one’s personal residence. Such placements are also subject to rule 144, but may be eligible for trading after a year, assuming all other requirements are met. It is important to give complete disclosure of company information to any investor. If non-accredited investors are desired, a Private Placement Memorandum may be prepared, usually be an attorney experienced in securities law. These offerings usually are made in accordance with SEC Regulation D, taking advantage of certain exemptions authorized by the government.
Before stock can be traded, it will be necessary to obtain a “legal opinion letter” from an attorney with knowledge and experience in securities law. This letter provides the trade exchange with needed information as to why securities might be allowed to trade. The company, the stock-transfer agent and the trading facility all rely to a degree on the legal opinion.
Generally, a company wishing to be publicly traded will obtain an accounting audit for the most recent years of operation. This audit can be reasonable or costly depending on the accounting firm used and the time involved in putting the audit together. When an audit is obtained, the company can offer potential shareholders information which should have been verified by an accounting professional. It is possible to trade with company generated financial information but such information would have to be produced in a GAAP format (Generally Accepted Accounting Principles), which is often beyond the abilities of the company personnel.
When applying to trade, a company will file a, often extensive, document prepared in accordance with Rule 15c2-11, which provides reviewers and venues with needed information to make certain the company qualifies to trade publicly. Along with this document which is usually prepared in outline format, a company requires a CUSIP number provided by a private company recognized by government and industry to assign and track companies.
Usually one of the final steps in preparing for trading is to obtain a trading symbol, which will provide an identity for the company for buyers, sellers, and brokers. The symbol is usually obtained by a stockbroker, often the brokerage firm which submits the trading information to the trading venue. In order to obtain a trading symbol, a company must have a CUSIP number.
Once a company makes the decision to become publicly traded, a contract is usually entered into with a stock transfer agency. STockbrokers are a source of recommendations in this area. When the necessary information as described has been gathered, including the legal opinion letter, a transfer agency may agree to handle the company’s stock ledger, issuing stock certificates in accordance with corporate resolutions and authorized legal opinions. The agency will keep track of shareholders and trades usually for a reasonable monthly fee with additional costs for specially generated reports. Tracking stock is not a task suitable for most trading companies. Attempting to handle this task “in house” can also be the source of sever legal problems.
Once the steps are completed as outlined, a company may; through a brokerage firm, file to become publicly traded. This process can take several months as the authorizing agency usually issues “comments” which must be answered correctly and adjustments made until trade authorization is given. There is also the possibility of trading on an “unsolicited” basis, which while not requiring a filing process, still requires approval of the corporate information for proper disclosure, completeness, etc., which may be time consuming as well.