There are several different ways for a company to become a public company. The future goals and desires of the company will be a major deciding factor in how a company. For example, if the company desires to raise capital through a public offering, then a Initial Public Offering could be the way. If the company desires to become a public company, but does not need to raise capital from an IPO, then merging into a ”shell” company could be the way. Many companies merge into a “shell” company because the investors want the company to be “public” before they put in the infusion of capital.
Some of the methods of becoming a public company is briefly described below. None of the information is intended to be legal advice, on informative. We recommend that the officers of the company discuss all such options with the legal counsel of the Company.
An I.P.O. (Initial Public Offering) Through a Broker-Dealer
There are very distinct advantages with doing an I.P.O. through a broker/dealer. An I.P.O. done through a reputable brokerage firm usually allows for larger offerings and more assurance that an underwriting can get completed. A major factor in using a brokerage firm with a substantial client base for the underwriting is that the firm may get other brokerage firms involved in the underwriting (a syndicate) and they all continue to take a position in the stock long after the offering is completed, thus maintaining a market for the stock. While the sale of the securities through a broker will cost a percentage of the offering, it is usually well worth the additional costs to insure the completion of the offering and the aftermarket.
A Self-Underwriting (I.P.O.)
Company management may feel confident that they can locate investors directly and therefore do a self-underwriting, not using a broker. It is possible for a company to sell its stock directly to the public, without the use of an underwriter or professional intermediary. While this may be possible, especially if the underwriting is for a small amount, there are still inherent negatives to a self- underwriting. Especially in assurances that the deal can get completed and in the aftermarket of the stock. However, the Internet and the World Wide Web has made technology and opportunities available to companies that did not exist a few years ago. It allows for the publishing and distribution of its prospectus to solicit funds from a wide audience, without the use of a professional underwriter. A company may also use the Internet to establish their own "bulletin board" to assist potential buyers and sellers. It is very important that all state and federal laws and rules be met in any offering of a company's stock, and that professional advice be sought.
An Internet Offering (I.P.O.)
An Internet I.P.O. is simply making an offering of the company stock through the Internet. There have been few successful Internet underwritings to date, however the trend is growing and it is expected that many more offerings will be made in the future. Again, like any other offering of company stock, either public or private, all state and federal laws and rules must be met and full disclosure made. Professional legal counsel is a must in any underwriting.
A merger into a shell or blind pool as a means of taking a company public is totally different than a underwriting. It involves merging the private company into a public "shell", or a "blind pool", a company that is presently public but has no sales, and usually no assets or liabilities, but does have shareholders. The "shell" or "blind pool" company may or may not be a reporting company. It may have as few 20 shareholders and as many as several thousand.
A "shell" company may be one that went public years before and then later closed the business that they were in, however remaining a public company and keeping their reporting status.
When a merger takes place between the shell company or blind pool and a private company, the principal shareholders of the private company will control the reorganized public company. This type of merger can be a very effective and fast means for some companies to achieve a "public" status. This is especially effective for a company that may not be quite big enough, or have the track record of sales and earnings, or simply not have the "glamour" for a full public offering. It is also a method of becoming public usually much faster and with far less front-end cost. However, there are drawbacks to this type of merger and all pros and cons must be carefully explored.
Advantages of An Initial Public Offering (IPO)
Needed funds may be obtained from the public offering. (Providing the offering is successful)
A public offering of company stock (IPO) should improve the company's net worth, perhaps enabling the company to obtain additional capital or borrow money on more favorable terms.
A public company, with its stock quoted “over-the-counter” may be able to more easily expand through acquisitions, using it's own stock rather than depleting needed cash.
A public company may be better able to attract and retain more highly qualified personnel by offering stock options, bonuses, or other incentives involving company stock with an ascertainable market value.
With public ownership of its securities, the company may be in a position, become better known nationally, to gain prestige and improve its business operations.
With the Company stock quoted “over-the-counter, there may be an easier possibility of converting debt to equity and to strengthen the company's balance sheet.
From a lenders perspective, an equity offering of the Company’s stock, may strengthen the financial condition of the company (reduces leverage).
If the price of the stock remains favorable, it may be possible to obtaine future financing more easily since the company can offer investors a security that is liquid, more freely tradable, with an ascertainable market value.
With the company being trading over-the-counter, it may mean more liquidity for the owners of the company, including founders, venture capital and other professional investors..
An IPO for the Company may enable the company to eliminate existing personal guarantees to lenders and others and, if sufficient capital is raised, allow the company to avoid future personal guarantees.
By establishing a public market for the stock of the Company, it may allow the founders and major shareholders to achieve a psychological sense of financial success and self-fulfillment.
Disadvantages of being a Public Company Public
There is a very significant cost involved in going public. There will be substantial accounting, legal, printing, travel and man hours devoted to preparing for a public offering.
In becoming a public company, significant information must be disclosed in great detail about the Company, and all of this information becomes public information, including sales and profits, executive salaries, transactions with management, competitive position, mode of operation and other material information.
Becoming a public company usually means that there are many shareholders of the Company. These means that management of the company may lose some flexibility in managing the company's affairs, particularly actions which require shareholder approval. As a public company, there may be practical, if not legal, limitations on salaries and fringe benefits, relatives on the payroll and certain other operating procedures. As a public company, the Board of Directors and officers of the company may not have the ability to act quickly if approval is required by shareholders or outside directors.
Under numerous state and federal laws, the officers and directors of the company assume serious additional responsibilities to its shareholders and the general public. The company must report any material change in the company through filings with the SEC, which are posted on EDGAR. The Company must inform shareholders and the public of business operations, financial condition, changes in management, and any other event which may materially affect the company or the public's investment decision relative to the company's stock, through it regular filings with the SEC and news releases. Founders and other insiders may lose control of the company if a sufficiently large proportion of the shares are sold to the public.
In a public company, officers and directors may become subject to a class action or derivative lawsuit alleging violations of corporate and securities laws, causing time-consuming, distracting and an expensive defense, even if the claim has no merit.
While the owners of a privately held company may, for whatever reason, not want the company to pay dividends, the underwriters for an IPO may require dividends to be paid.
By taking their company public there may be a negative effect on an estate tax of the founders.
Being a public company and reporting to the SEC, there are numerous additional expenses annually, including legal expenses in preparing the required reports, audited financial statements, preparation and distribution of proxy material, quarterly and annual reports to shareholders, fees for transfer agents, public relations, as well as other costs, including the time required by company officers devoted to these matters.
The value of a public company will fluctuate with the buying and selling of stock by the public investors. This can be dramatically influenced by a number of factors, including how well the company is doing, the changes in market conditions and the ability of the company to maintain an effective public relations program to communicate its worth to its shareholders and to new investors.
Decisions About Taking Your Company Public
There are numerous considerations which must be addressed in the decision to go public. Many of the considerations and decisions are very technical and could have both a short term and a long term impact on the company. Such decisions should be made with the help and advice of professionals who have extensive experience in I.P.O. underwritings, shells, mergers and public companies.
While it is impossible to cover all subjects involved, and the depth in which they should be discussed, the information contained in this material is simply present some subjects which should be addressed. The information contained here assumes that the company is intending to become a public company, either through an IPO or a reverse merger, and therefore does not attempt to address private placements of corporate stock or other means of financing. None of this material is intended to be legal advice. A competent attorney with extensive SEC experience should be consulted for advice on going public.