08 Dec Direct IPO: A Detailed Process & Cost Analysis
The goal of many a micro-cap company seeking public financing is going public without going broke. Doing so requires understanding for both the costs of arrival as well as the on-going maintenance to stay public. Because corporate financing options available to public companies can differ greatly from those of private companies, the benefit of going public can more easily be weighed against the initial and ongoing cost of being public. In addition our discussion on cost typically coincides with the need for the speed. We’ve discussed this previously, admitting that there can be a cost, quality and speed trade-off when it comes to budgeting both time and money toward consummating a deal.
What follows is a detailed examination of the process of going public through a Direct IPO along with the associated time needed to get both approval, registration and liquidity. Estimates on both cost and time are estimates based on both experience. The actual time to market as well as the cost to get there may vary depending on individual circumstances. What follows should be helpful in determining if taking your company public is the right move. Considering the differences between various “go public” strategies–in this case–we’ll examine the two most common “go public” transactions: the direct IPO and the reverse merger.
Direct IPO: The Process & Cost
The cost and timing of going public with a direct IPO (most often referred to as a direct public offering) can vary widely from firm to firm and depends on both the accounting and attorney assistance you’ll be needing through the process. Once you have the right number of shareholders in the firm, the common stock has been registered with the SEC, your Form 15c2-11 has been filed with FINRA, you’ve applied for DTC eligibility and you have a trading symbol ready for the OTC, you’re public. Each of these steps we’ve outlined below, including a rough idea of the time and cost involved.
- Corporate Review and/or Recap. A thorough initial review of the existing corporate structure, including all authorized stock classes, the number of authorized & outstanding shares, past securities issuance, rights & preferences of shares, outstanding convertible stock and any exemption filings for the stock. There are numerous types of capital structure that can work for a public company, with some forms being more ideal than others. In many cases, the company will require recapitalization, including changes made to the Corporate Charter or Articles of Incorporation. Review and due diligence of capital structure is all done prior to going public. Doing so after a deal has been consummated significantly increases the time and overall cost. It also remains easier to perform due diligence when the number of shareholders is low–which is ideal to do when the company remains private. The cost: $1,500 to $4,000. It can usually be completed in a couple of weeks.
- Private Offering/Private Placement. A private offering in conjunction with a direct IPO is not uncommon. Money often needs to be raised for a number of reasons including, but certainly not limited to, the SEC filing, accounting audit, other legal expenses and sometimes to assist in getting the right number of shareholders into the corporation. The private placement requires a memorandum drafted by legal counsel, prepared for potential investors. This document will typically include the go public strategy and the entire business plan, indicating the corporate structure in the deal, expected performance of the business and use of funds. When a private placement occurs, the use of funds typically goes first toward the filing, compliance and legal cost of getting the company publicly traded. We know people that do PPMs for as little as $5,000, but we’ve seen good PPMs drafted for as much as $25,000 or more. The time of a PPM, depends on two factors: 1) the length of time it takes to complete the private placement doc and 2) the length of time it takes to raise the money in the investor outreach phase. Step one typically takes several weeks, but actually raising the money in a private placement has more to do with personal and business contacts who may be willing to shell out the investment money for the deal.
- Registration Statement. If the company does not wish to wait a year between the filing and having free-trading stock, then they’ll file an S-1 registration. Waiting a year to get free-trading stock would require the filing of a registration statement on Form 10. A standard financial audit will be required with the S-1 registration. In the process of filing the S-1 non-affiliates will likely have all of their shares registered with the SEC and have their respective restrictive legend removed. This is how the initial group of non-affiliate shareholders provide a market for active and free-trading stock. The cost here ranges from $10,000 to $70,000 depending on who you use. That cost includes both the audit and the registration statement drafting and submitting to the SEC. Generally, you can expect something in the middle of the road in terms of cost. The audit usually takes a few weeks, the registration can take between two and four months.
- Affiliate Filings. In connection with the aforementioned registration statement, officers, directors and shareholders with 10% or greater in company ownership must complete Form 3S (Section 16 filings). While filing is the responsibility of the affiliates, the company usually foots the bill here. Most of the firms include the cost of affiliate filings in the cost of the registration statement. SEC EDGAR codes are required to file Form 3S. The time involved in this step is typically immaterial and not part of the critical path.
- Form 15c2-11. The filing of Form 15c2-11 with FINRA is required once the registration has become effective with the SEC. This piece of the pie is typically filed by a market-maker/broker-dealer firm who represents the private company in the transaction. Preparation, filing and back-and-forth with FINRA of the 15c2-11 is most often performed by legal counsel. The cost can range from $3,000 and I’ve seen it quoted as high as $10,000, but never heard of someone paying that much. The process can take up to a couple of months, depending on the number of comments and amendments required by FINRA.
- DTC Eligibility. Once the company has shares registered with the SEC, a 15c2-11 filed with FINRA, has a ticker (with corresponding CUSIP), the firm can then apply for DTC eligibility through their affiliated broker. Having the right broker and clearing firm make this part of the process much more simple. This process can sometimes get hung-up between your broker-dealer and your clearing firm which can drag the process from a quick week or two to over a month.
The cost generally runs about $15,000 or more for both the cost of the legal work and the brokerage and clearing firm fees.
Clearly the cost in time and cash to go public ranges, depending on the accounting and legal help you retain. I’ve found that those who fish at the bottom of the barrel typically pick up garbage. While it may be tempting to save money on the filings, it is sometimes best to use good reputable professionals even if the cost is somewhere in the middle of the road. The cost typically ranges between $40,000 and $150,000 from soup to nuts. It can take anywhere from 6 to 12 months for full free-trading stock to be changing hands, but this depends on the how short or long you decide to drag out step two above. If the offering remains open and you need to proceed through the entirety of step two, the process will generally take the full year. The total costs include audit cost, registration statement reveiw, EDGAR costs and costs for the transfer agent.
You can get it done more cheaply, but oftentimes that can mean giving up a bit more in stock in the company, but that trade-off may be worth it to get the right PCAOB audit firm. If done this way, the cost to go public is much less expensive than most think. As always, each circumstance warrants its own detailed examination and custom-tailored fit.