Despite what some shell promoters claim, going public isn’t a slam-dunk, two week process. It takes time. In the case of a reverse merger, you’re often trying to fit a square peg in a round hole. And even if you go public via a direct public offering, there are numerous financial regulatory issues that need to be hurdled before your stock shares will be “up and trading.” The preparations that seem simple seldom are and preparing for the day when your company is public is likely to start far in advance. The two most common preparations that are often ignored are converting to the proper corporate structure and participating in a financial compliant audit.
Proper Corporate Structure
Unless a company was intent on going public from the outset, it’s highly unlikely the business was structured properly. All publicly-traded companies require C-corporation status. Period. While the process of converting from an LLC or S-corp isn’t rocket science, it is part of the requisite process prior to going public direct or performing a reverse merger.
C-corporations are not the most efficient structures for many a small business. They really become most efficient when a company reaches a particular size threshold. McStartup has a good run-down on the differences between the three corporate structures and how they relate. When companies elect C-corp status, they’re most likely to incorporate in either Delaware or Nevada. This is due in part to helpful tax structure, in the case of Nevada, or because of the well-defined corporate law, as in the case of Delaware.
So if you’re contemplating, the conversion cost is often minimal, unless taxes are due, but the ongoing costs will likely be higher thanks to the double-taxation of a C-corp.
Yes, you will need an audit prior to going public. That means you’ll likely need audit-ready financials prior to your audit. Corporate managers often forget that PCAOB audits are the last line of protection before the SEC takes task to your business. The first step, before the audit even occurs, is to ensure your financials have been prepared by a PCAOB-compliant firm. Sarbanes-Oxley has forced an additional layer and cost that many firms simply don’t wish to incur. It’s at least one of the reasons many have claimed the traditional IPO market was so dry and some proposals have been put forth to attempt to redact it.
Financials prepared in accordance with GAAP, suitable for a publicly-traded company, requires a good firm, but for micro-cap companies you want compliance without having to pay out the nose for it. That’s quite possibly the most difficult aspect of getting your financial house in order before taking your company public.
Because we encourage an investment environment that focuses on sustainability, we highly discourage jumping into the public market by joining the ill-fated pink sheets. Because pinks allow for far less transparency and disclosure requirements, the opportunity for the stereotypical reverse merger shenanigans is rampant. And since we’re trying to elevate reverse mergers above their tainted past, we only like to deal in opportunities where there is a sound audit performed. In short, we like what the SEC likes and frankly you should too.