+ Taking Your Company Public
+ Methods of Going Public
+ Reasons to Go Public
+ Pros to Going Public
+ Cons to Going Public
+ Difficulty in Marketing & Market Makers
+ Alternatives to Going Public
+ Structure of Your Public Company
+ Options for Going Public
+ Partners in Your IPO
+ Exiting Through IPO
+ Public Company Trading Strategies
+ Our IPO Services
We are an investment bank, assisting private companies in their desire to list and trade on public exchanges (e.g. NYSE, NASDAQ & OTC). We are a recognized leader initial, direct and alternative public offerings.
We provide going public business expertise an unparalleled results for our clients in North America, Europe and Asia. We are dedicated to serving our client’s public markets needs and achieving their goals. We hold the experience, knowledge, staff and resources to ensure successful, practical and cost-effective going public solutions.
A successful corporate securities and offering transaction requires a team of professionals with the right combination of legal knowledge, securities acumen and capital raise creativity. Our focus and team oriented approach ensures that we execute for our clients each and every time.
There are many strategies for taking a company public. Most are expensive and/or time consuming. Three popular methods are the IPO (Initial Public Offering), APO (Alternative Public Offering) and DPO (Direct Public Offering).
Below we provide some details about the process and reasons for taking a private company public.
Taking your company public by IPO will require a large investment bank to underwrite your offering. The investment bank is basically purchasing your private shares today with plans to sell them at a profit to the public. Although you may receive funding sooner than later, the entire process is expensive and very few companies meet the stringent criteria.
A DPO or “registered offering” allows a company to sell shares directly to the public. Although much less expensive than an IPO, the company will not receive funding until after the company begins trading and the public purchases the stock.
This method of going public provides immediate funding because its very attractive to investors who purchase shares in a private placement (PPM), which are later registered and sold to the public at a profit once the company begins trading. This method is typically done through a reverse merger with a public shell.
A publicly traded company has greater financing alternatives than a private company. A publicly traded company can return to the public markets for additional capital via a bond or convertible bond issue or secondary equity offering. A public status can also provide favorable terms for alternative financing from public and private investors. Additionally, public lenders and suppliers may perceive the company as a safer credit risk, thereby increasing the opportunities for favorable financing terms. Also, a publicly traded company’s stock can be utilized to be used as collateral to secure loans.
In general, public companies have a higher valuation than private enterprises. This fact has been proven by many studies to be up to the multiple of five times. In a report in Entrepreneur Magazine, a study was cited that showcased some of the reasons for higher public company valuation. They included market liquidity, profit measurement, capitalization & capital structure, risk profile and differences in operations. This is very important in an exit scenario whereby your company may eventually be acquired by another company.
A publicly traded company has created a market for its stock in which buyers and sellers participate. As such, stock in a public company is much more liquid than private company stock. Being publicly traded may provide a ready outlet for investors, institutions, founders, owners and venture capital funds.
It is increasingly common to recruit and compensate executives and employees with a combination of salary and stock. Stock based compensation can be instrumental in attracting and keeping key personnel. An allocation of ownership or division of equity can lead to increased productivity, morale and loyalty. This type of compensation is a way of connecting an employee’s financial future to the company’s success.
Such stock compensation to employees is more desirable if the stock has a public market. Also, certain tax advantages are a consideration when issuing stock to an employee. Generally, capital gains taxes are lower than ordinary income taxes.
Stock in a public company can be issued as a performance based reward or incentive. As such, the public company may be able to lower its operating overhead by compensating employees with cash and a stock option plan.
Being publicly traded can help a company gain prestige by creating a perception of stability. A company’s founders, co-founders and managers gain an enormous amount of personal prestige from being associated with a client that goes public. Prestige can be very helpful in recruiting key employees and marketing products and services. This exposure may lead to improved recognition and business operations. Often a company’s suppliers and consumers become shareholders, which may encourage continued or increased business. In this example, a public company could have a large competitive advantage over its private competitors.
A publicly traded company may generate prestige, publicity and visibility, which is effective when marketing your company and its products or services. Public companies are more likely to receive the attention of major newspapers, magazines and periodicals than a private enterprise. A successful public listing can get a company’s story out to the world, which may open an opportunity for investors that are not suited for an investment in a private company. Additionally, being publicly traded makes it easier for other companies to notice and evaluate the firm for potential acquisition.
A publicly traded company tends to have a higher profile than private firms. This may be important in industries where success requires customers and suppliers to make long-term commitments. Indeed, the suppliers’ and customers’ perception of company success is often a self-fulfilling prophecy.
Once a company is public and the market for its stock is established, the company’s stock can be looked at as “currency”. It is sometimes looked at more favorably than cash due to long-term tax implications when acquiring a business. This fact, along with the higher valuation of a public company, can make a key acquisition less expensive than for its private counterparts.
One of the important benefits of being a publicly traded company is the fact that when the company’s stock eventually becomes liquid, it may provide an effective exit strategy and financial freedom for its founders and employees. A public market for the stock may also provide a potential exit strategy and liquidity to the investors. Owning a publicly traded stock may enhance the personal net worth of a company’s shareholders.
Many a company founder and even investor have bought into the delusion that performing an IPO can guarantee immediate market support for the company’s stock. This is fantasy. Before we get into the reasons why, let’s first discuss the difference in process. It will help to paint a picture as to why traditional IPOs may not be all their hyped up to be.
In a traditional IPO scenario an investment bank will serve as the lead underwriter of the stock. They’ll work with company management and shareholders to draft a company prospectus for the SEC registration statement which, after numerous rounds of comments from the SEC and NASD and various and sundry state organizations, is the underlying securities registered with the SEC. Once the lead underwriter has approval from the SEC, other broker-dealers are enlisted to find initial buyers for the company stock. Other brokerage firms will typically purchase blocks of shares (at a discount from the offering price), reselling them to their clients–both institutional and otherwise. Their commission is gleaned from the spread between the offer and their discount. In public offerings, the investment bank will typically purchase stock directly from the company, putting them in a position of risk if they’re unable to gain market support. Remember, private deals include a PPM with an agent acting as a go-between broker. In this scenario, the brokerage house actually gets in bed with the IPO candidate by owning and reselling securities in the offering.
IPOs are No Guarantee
Brokerage firms who offer securities in an IPO are often under contract to continue their participation once the shares have begun trading in the general public. This is done by design as a “prop-up” tool for the earliest investors. The initial groups of buyers in any IPO deal want to get out early by selling their shares and making a quick profit. The brokerage firm acts as an initial active buyer of the shares in the open market to ensure the the stock is not initially “dumped.” It’s the age-old pump-and-dump scheme of the past with a little twist, someone is behind the curtain propping things up to ensure things just don’t get “too” bad.
Even with this type of false propped support from the underwriter in the deal, there are still many examples of stock tumbling at the time of an IPO. Facebook anyone?
Company filings after the market closed on Friday night however revealed the extent to which the banks who led Facebook’s initial public offering – in which $16bn of shares were sold to new investors – were forced to move in to the market and buy shares in order to keep the price above the $38 level. Morgan Stanley, Facebook’s lead financial adviser, ended the day with 162m shares, worth $6.16bn. Other banks including JP Morgan and Goldman Sachs also bought shares, ending the day with $3.2bn and $2.4bn holdings respectively.
In short, without the aftermarket support from the brokerage firms, the bare nature of the beast would include a natural fall in the stock price. An Initial Public Offering is, at least initially, made for investors who want their liquidity out of a potentially long-held investment. When they start selling, the stock will drop. Large underwriters can afford to take a hit to signal the market in general isn’t going to tank the stock. But, once the IPO is over, there is simply no guarantee that the general market itself won’t continue its sell-off in the months following an IPO.
Certainly, many reverse IPO opportunities can fare far worse than their over-hyped counterparts, but just because a company does an IPO, doesn’t guarantee traditional pump-and-dump schemes weren’t at play.
While the steps in the going public process are similar regardless of which route one takes in achieving trading status, the routes, which are available to that point vary widely. Here are listed paths to tradability with which we can offer assistance:
A “505” offering, under Regulation D allows a company to raise up to $5,000,000 in the period of one year from “non-accredited” investors totaling 35. There are specific requirements for this private offering and definitions of “accredited” vs. “non-accredited” needs to be disclosed and understood by potential investors.
Under rule 144, it takes a year after an offering is completed to file necessary paperwork in order to become publicly traded. This is probably the easiest way of going public. It can be done in any state so friends and associates can purchase stock through the offering within specified parameters. This is often the easiest menas of raising a modest amount of capital and becoming publicly traded. Because it is open to “non-accredited” investors, audited accounting information is required.
This offering is similar to a 505 offering with the exceptions of not requiring audited financial statements and the maximum number of investors is not specified but they must be “accredited”. While this may be less expensive because of a eriment, it may be more difficult to obtain “accredited” investors, which could affect the completion time. This may be preferable to a 505 when feasible, because of the accreditation factor.
Filing a document such as an S-1 or Form 10 registration adds expense to the offering process but can result in a “fully reporting company” which is considered by many to have more value than a non-reporting company. One advantage of this type of offering is that once trading, the shares of the company acquired in the offering process may be tradable in 6 months as opposed to one year under rule 144.
Fully reporting companies have on-going dislosure and doumentation requirements, which may help an investor in making investment decisions. From the company standpoint, there are substantial added expenses but there also may be a substantial increase in corporate value.
There are a number of offering formats not described here, such as a Regulation A, Regulation S, 504’s including “Score” (U-&), etc. While we have some experience with these, at the present, for a number of reasons they are not recommended.
Since what is being traded in a publicly traded company is its stock, it is important that the equity for the company be thought out carefully to avoid problems down the road. One of the problems that plagues the owners of trading companies is losing control. This happens when the controlling shareholder(s) issue an amount of stock to others, that places the owners in the minority in regards to ownership percentage. In order to avoid this problem, it is important to look at what the structure will be after all needed capital is raised and to ensure that the controlling shareholders will be able to maintain an ownership percentage sufficient to maintain control.
It is usually more difficult to increase equity after the company achieves trading status that it is before. One way of increasing equity after becoming publicly traded, is to make the regular periodic issuance of additional shares part of the owners compensation. Another way is to retain the ability of adding assets which the majority owners control so that more equity shares can be distributed to them. It is usually easier to issue enough shares to begin with to maintain sufficient equity than to have to find ways of issuing more later.
It is important to start from the end and work backwards when planning offerings and acquisitions so that the danger of losing control is minimized.
Initial public offerings are the best known but not the most common way of becoming publicly traded. In recent years, there have been lengthy period s of time in which there were no IPO’s. These are “underwritten” by large brokerage firms, often with guarantees of capitalization to the company going public. Today, there are only a fraction of the full service brokerage firms left and only the very large ones seem capable of doing an IPO.
This is the most common means of becoming publicly traded. The best known version of a Reverse Merger is when a private company merges with a trading company that failed as a business. The company still trades but may not have much happening in terms of business, so it is sold to new company, often with a large “reverse” in issued shares. This way of going public is fairly inexpensive (usually $200k to $300k) but has a lot of risks – not recommended.
This is an increasingly popular way of becoming publicly traded. The vessel into which an operating business is merged, usually has a very small amount of shares issued, so it is much easier to maintain “control” in terms of share ownership. The current price of a fully reporting, trading, virgin “shell” is about $400,000. With 90 plus percent of the stock deliverable. A virgin shell (“spac” or “419”) with SEC approval can be purchased for $65000 to $100,000. These are companies specifically designed for a merging operational company. Once the company is audited and merged in, final trading approval can occur rapidly. Trading approval comes from FINRA, which is connected with the National Association of Securities Dealers (NASDAQ).
A private company can issue an “offering” followed by a “stock registration” and then it can file to trade. This process probably averages a year, but is relatively inexpensive: usually in the $50k to $100k range.
The going public process often requires the unique and specialized assistance of dozens of knowledgeable and experienced industry professionals. No two deals are ever completely alike and individual adaptation is regularly used in assisting the unique needs brought by clients and their respective companies. Our affiliate partner program provides a means for using relationships for maximizing the possibility of successful outcomes.
Our partners maintain access to our growing database of thousands of industry buyers, sellers and everyone in between. The right partners will find our affiliate relationship highly fulfilling and extremely lucrative. We maintain our affiliate program to help ourselves and our affiliates in increasing the quality and quantity of our dealflow. As with any such program, we adhere to the mantra that revenue generation is tied directly to disciplined management and that without dedicated incentives, affiliate programs can quickly turn to a costly time-consuming exercise devoid of the desired incremental revenue.
As an industry leader in reverse mergers, self-filings and alternative public offerings, we pair sophisticated marketing and long-term networking as our primary strategy for driving success with our partners. We also maintain a high level of customization with affiliate relations, ensuring each partner receives the attention, brand awareness and support deserved by any industry professional.
We’re always interested in forming ethical, productive and lasting partnerships with the following types of organizations:
It is thanks to our long-standing affiliates and partners that we are able to facilitate some of our most effective deal-sourcing activities. Our partners also receive several additional benefits for deciding to be included in our partner program including direct access to our regular email marketing campaigns, links on the ReverseMergers.com website and opportunities for working on future deals together with ReverseMergers.com and its team. We’re always interested in having a discussion on how a partnership with your firm can be mutually beneficial to both of our firms. Contact us to learn more.
While the IPO market slowly cools, we are still seeing many a private equity sponsor looking longingly at the public markets as a method for exiting portfolio company investments. Unfortunately for many private equity sponsors and limited partners, many of the nuances incident to becoming and maintaining a public company are overlooked. Expectations of a quick liquidity event and a successful exit through IPO can become over-shrouded in the issues inherent in the processes, regulations and hiccups inherent throughout the pre and post-IPO process. Keeping in mind some of the following nuances will be helpful before one considers investing as a sponsor or private equity limited partner.
The entity structure of a company with an IPO on the horizon is likely to look different than the initial structure of the original private investment. Converting from a flow-through entity through “up-C” to a C-corp is often best accomplished when the existing stockholders or operating agreement has flexible terms, allowing the owners to more easily restructure the investment to ensure greater tax efficiency. Covenants allowing investors and co-investors to both reasonably appeal for and implement new management structures, allow for a smoother transition to the public market if and when that becomes the determined vehicle for exit liquidity.
Public company governance issues can negatively plague the original private investors in the now public vehicle. Post-IPO the original private investors will likely hold enough of the voting block to hold the majority of the board seats. As the investors sell their equity into the public float their ability to maintain their hold of the majority control over the board is likely to dwindle. Planning for and implementing a tiered step-down in voting rights as investors exit their position. Stockholder agreements should include rights to nominate one or more board members, including proxies that plan for the liquidity over time.
Determining the who, when and how shares are sold by the original sponsors once the company becomes public can be a key deal component for registered underwritings. Shares can be sold through registration rights, block trades and Rule 144 trades. Strategic planning is required to ensure the coordination of share sales. In most of today’s public market sell-downs, seller coordination committees help plan for sponsors to communicate their selling efforts as original shareholders look to liquefy their stakes. Without proper coordination among shareholders, blocks of shares can hit the market at inefficient amounts and intervals. Coordination of the sell-down among original sponsors can help to maintain a steady flow and natural market in the public float.
The rights and relationship of shareholders can significantly change between the time of the original investment and after the company goes public. The relationship changes further as shareholders sell-down the majority of their shares. Pre-planning for things like anti-takeover provisions and other rights can ensure for good, long-term sustainable governance even after the original shareholders do not maintain control over the majority share block.
Being preemptive in how sponsors plan for and implement an Initial Public Offering, including negotiating pre-IPO structures will not only solidify how company owners can better prepare for their liquid exit (including potential tax issues), but such planning will also cement the company for long term sustainability post-IPO. Thinking carefully about existing stockholder agreements, including things like indemnities, D&O insurance, taxes and regulatory considerations is necessary to ensure the original shareholders get the best deal post-IPO. Re-trading can be nigh to impossible once the public offering is in place and the provisions are solidified.
One of the questions often asked by executives considering going public is how to obtain market makers. When a stock first trades, it does so because a broker-dealer sponsored the company to the NASD (“Finra”) and filed the paperwork necessary to trade. For doing this, the broker is given an exclusive ability to trade the stock initially. After the period ends, other brokerage firms may also take part in this process and usually do so if there is sufficient trading activity.
Regular news event must be planned and press releases issued followed by contact with prospective stock purchasers. Press releases are not expensive but are necessary in order to demonstrate that a company is actively growing and pursuing objectives which will increase share value.
When a company first trades, the shareholders who have tradeable stock are reluctant to sell their shares because they are hoping for a rise in stock price. Because of this, it is often quite easy to raise the share price substantially with a few trades and a couple of strong press releases. While it is important to take advantage of situations like this, it is also important to remember that other shares will come into play when the rule 144 holding period ends which may make it more difficult to maintain a high share price. This is why it is necessary to plan ahead.
Accessing capital is one of the most important components for growing enterprises with promising technology and management. We assist in making this process easier by providing public liquidity for private business. Contact us for more information on how our expert solutions can fit your business needs.
Consummating a reverse merger provides an alternative way for companies to “go public” by utilizing an existing public company as the vehicle to fold in a private entity or specified assets. Through our team of seasoned professionals and a network of expert corporate and financial partners, we deliver highly specialized solutions for taking your business to the next level.
There are a myriad of reasons why a company may consider public status. Perhaps the strongest motivator is that it provides an “exit strategy” for investors. Without 51% ownership in any company, investors give up control and the liquidity that can come from making transaction decisions. Owners and management may never provide the investor with an exit strategy: a means of making a profit or even breaking even. If the stock trades on a public exchange, however, investors are free to buy and sell stock as they deem necessary. Being public offers investors a real strategy for exiting an investment, significantly improving the company’s chance of raising capital.
Another reason a company might consider “going public” is that by structuring the company for eventual tradability, the value of the company itself increases. 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.
Going public by a reverse merger also offers a viable alternative to onerous venture capital, can be a means of using stock as a bartering tool in M&A and provides a good incentive for talent acquisition using stock options. Numerous other benefits are available to private companies seeking to gain access to a public exchange. It’s much less expensive than most people think. Contact us today to find out more.