Myths About Public Company Share Registration & the SEC

Before I delve in to a discussion about what the SEC does and does not do, let me be very clear: the SEC produces and changes its opinion fairly frequently and–due to the complex nature of most SEC rules and arguments–it would be presumptuous to assume what the SEC is thinking in every case. All we have are cases and the law, which has come over years of rule-making, rule-breaking and rule-bending. While the SEC is often seen as a pesky operator bent on making it difficult for capital raisers and deal makers to do their job, it’s an institution that cannot and should not be questioned as to its legitimacy. While I might disagree with some of Dodd-Frank and the onerousness of Sarbanes-Oxley on the SME, they’re there for a specific reason: someone broke the rules and consumers need some sense of protection from themselves when it comes to unscrupulous characters looking to take advantage of unsuspecting and unsophisticated victims.

And, while there are instances where the SEC really does run amuck with their attempts to catch perpetrators, they are a necessary evil in our capitalistic society. Interestingly, however, there are many who misunderstand what the SEC is and what it cares about when it comes time to begin your company’s own public offering process. When assessing the key factors of what really matters to the SEC, many operators find it truly surprising just what does and does not matter. Here are just a few.

The SEC doesn’t care if your company is a start-up

As we have discussed previously, a start-up company can go public the story should be awfully compelling. It helps to have at least some revenue. Intellectual property is also a plus. In essence, some traction along with a bit of a barrier to entry is helpful, especially if you want to get your stock approved for trading. The SEC does require at least something in an offering. Some blank shell without a compelling story reeks of fraud and manipulation. If the company is legit, the SEC does not ultimately care if the business is a start-up.

The SEC doesn’t care if you have little or no revenue

Revenue is nice and certainly important for the long-term sustainability of the business, but ultimately it’s not a requirement on the part of the SEC to be approved for trading. Typically the SEC does like to see at least some revenue. This helps to at least ensure the company is not a complete fraud from the beginning.

The SEC doesn’t care if you lack financing to succeed in your plan

Proper financing is not necessary to get approved. The SEC also doesn’t care if a business fails or succeeds after the company goes public. The regulators’ main concern is for investors. Will the investors be protected from fraud? Ultimately the SEC does not care whether the company has a quality business plan or even succeeds at all in its intended endeavor. They’re not a filter for quality. They’re a filter for fraud and illegality.

The SEC doesn’t care about your company’s stock price

You can price your offering what you will. As an owner, you typically have much more latitude over the stock price than you might think, especially if you’re manufacturing your own shell or performing a direct public offering. If you’re intent on structuring your offering with warrants in an effort to raise capital, then the price of the stock could be a critical aspect of your strategy in pricing warrants for each share of stock. Doing this correctly and most effectively requires the help of knowledgable professionals including broker-dealers and securities attorneys. Proper structure and pricing of your stock could be key. Luckily, the SEC doesn’t care.

The SEC doesn’t care about the size or prestige of your auditor

If your auditor is qualified, it doesn’t need to be a name-brand. Your public offering also does not require the prestige of a Facebook or Alibaba IPO. In some cases, and based on the company’s internal strategy, they may need or desire to go public but without fanfare or an initial run-up in the price of the stock. While rare, this is perhaps one of the better circumstances for a company looking to go public through an alternative method as it doesn’t require crazy stock promotion. And as most understand, it’s the crazy stock pumping that gets most operators and their broker-dealers in trouble.

The SEC cares about a great deal of things in getting your offering prepared and ready. There are just a few things that they don’t care about at all. Understanding what’s important and what isn’t will help in saving money and time through the reverse merger process. Otherwise, time will be wasted in extracting and finding information that is unnecessary.

It’s like we’ve said before: taking your company public is easier and less-expensive than you think. Doing it right is really dependent on the goals and long-term strategy of the company itself. No two public offerings are exactly the same. Tailoring a specific offering requires knowledge of all the options at hand as well as an alignment with the company’s C-level. If you’re all on the same page, then it’s difficult to overly screw things up.


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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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