We’re often asked the question, “is my company big enough to go public?” While the SEC provides no specific threshold on size for going public, many of the exchanges limit the company’s market capitalization with thresholds the preclude many private companies in taking the next leap into the public market arena. The NASDAQ listing requirements, for instance, provide much more stringent thresholds for entry than does the Over the Counter exchange. In fact, for reverse merger candidates, heading to NASDAQ requires a year’s gestation on the OTC in order to qualify for the big leagues. But that doesn’t answer the question for smaller firms that are possibly in startup mode with promising technology but little to no revenue.
The SEC has no problem with startup companies entering the public markets. In fact, one of the purposes of going public in the first place is to raise capital. What they do care about is the legitimacy of the offering and startups, particularly those rolled into shells, have higher instances of illegitimacy and fraud than do their larger public counterparts. Hence, regulators are much more leery of allowing such firms in if they suspect the players, operators or deal makers are simply using a public vehicle to defraud investors of their hard-earned cash. No real barrier-to-entry may be somewhat true, but your story should be good enough to convince the SEC that you should be public and good enough to convince investors to open up their wallets.
We typically like to work with profitable companies with at least $2M in EBITDA. If you’re not profitable or below that threshold, that is fine, but the opportunity for a good capital raise lies best in those companies that already have at least some existing track record for success. We’ve seen companies listed on the OTC that have less than $100,000 in annual revenue and even startups with no revenue. There is just greater risk to investors and entrepreneurs alike when a company doesn’t yet have the traction to stand on its own two feet.
In short, if a company with little to no revenue has a good enough story, some formidable contracts or partnerships, protectable intellectual property or an officer that can drive the business forward in a real way, then the company may yet be a good candidate for going public. Unless you’re going public on NASDAQ, the Over the Counter exchange is the place to go public for smaller deals. The best public deals are those that build a great company before taking the leap to go public. If the company isn’t prepared and its plan and actual performance seems uncertain then it may be wholly exposed to manipulators, unscrupulous investors and even shorters and naked shorters.
While there is no real threshold for becoming public, the risks to companies with no revenue are higher than for their private counterparts. Legal exposure, increased regulatory cost and investor relations can all add to the increased pressure that already exists on startups that may have a hard enough time trying to succeed in the first place. While the failure rate for public companies on the smallest end of the microcap is high, my guess is that the failure rate isn’t different than some of the most well-funded venture deals. So, the next time a small company asks me if they’re big enough to head into the public markets, the answer is like most other questions in life: “it depends.”