How to Take a Company Public
Assessing the “going public” decision is certainly one of magnitude. Most large IPOs make headlines with their massive valuations (and often over-valuations) and flashy stories of humble beginnings. There are both upsides and downsides to taking a private company public. There are also huge cost disparities in the ways companies can get to the public markets, the most expensive being the Initial Public Offering (IPO). We’re often approached about raising capital for business growth, but the struggle is that a business without a solid exit strategy will likely not have the ability court investors like it should. My number one argument for going public is that it offers a great tool for liquidity. In other words, it allows investors to get their investment + growth out of the company. And, if the plan to go public is part of an overarching goal for the business, investors are much more likely. The biggest key for going public with small and microcap companies is to ensure you go public without going broke. In other words, that the process is cost-effective enough that nearly any private company with the right threshold of revenue can gain quickly gain the benefits of becoming public. Affordability lowers the threshold, meaning more companies–with or without outside investors–can gain the liquidity they need. Below is the basic process we take in taking private companies public.
- Pre-Incorporation Agreement
- Incorporation
- Initial Documentation
- Private Offering
- Legal Opinion
- Financial Statements
- 15c211 and CUSP
- Trading Symbol
- Transfer Agency and Certificates
- Trading Approval Process
Here’s more detail on the going public process outlined above. The process is less cut and dry than initially meets the eye. Each scenario requires its own individual assessment. In doing so, here are some considerations:
- Do you have the accounting resources to comply with FINRA and the SEC? It’s cheaper than you think, but you’ll likely need a couple thousand dollars extra per month for accounting fees relative to staying copacetic in your reporting duties with the SEC.
- Do you need the money for a one-time even or for on-going capital-raising needs like a wave of acquisitions or other organic growth needs. If you’re looking for a simple one-time cash-out, going public may not be the best option.
- Do you have the PR engine in place to ensure you’re communicating with investors in a timely and proper manner?
- Will your company be able to deal with the transparency of being public?
- How big is your firm? Will it be able to gain traction as a publicly-traded company?
- Do you have an effective Market Maker/Rainmaker/iBanker to market your shares?
- Have you weighed all your other options? Going public is not the right option for many firms. Weigh the pros and cons.
What about the cost of going public?
Nothing is free, despite what’s written on the web. Some firms will tout their ability to take a company public for free, but the catch is that you often pay dearly for it by sacrificing more equity shares in the business which, if you expect your company’s value to be boosted by a going public–will mean you forfeit more than the initial cash cost.
Often the cost to go public depends on the type of offering. There is more than one way to take a private company public. There are pre-qualification costs, up-front costs to get up and trading and then the on-going regulatory burden of staying current on your reporting. You’ll also be under more scrutiny from investors and analysts like never before. There is no cookie-cutter approach to the process. Just as each business we represent is different, so is the process and relative cost for each opportunity.
How Long Does it Take?
This question can also be answered with the annoying “it depends.” It can take anywhere from a few weeks to years, depending on whether your going public via a traditional IPO or by some type of reverse merger. One of the fastest and cheapest methods is through a SEC Rule 419 SPAC. And, depending on how dirty or tainted a public shell might be, the process of reverse merging may actually take a similar length as a traditional IPO, if not considered properly.
Conclusion
Public companies represent a graduation to the big leagues. Doing so is certainly not for everyone. Without an expert knowledge of the process and pitfalls, companies can–at best–waste a great deal of time and money or–at worst–get into fights with creditors, lenders or the SEC or FINRA, which no one wants.
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