How Can I Go Public Via a Slow PO?
Many owners of small businesses give thought to going public, but wonder if the risks and the expense may outweigh the rewards. They’ve heard that traditional Initial Public Offerings (“IPOs”) using registration statements are complicated and costly, and that Securities and Exchange Commission (“SEC”) reporting obligations can be significant. It has become almost impossible for a small private company to locate an underwriter for an IPO. As a result, many private companies seeking to go public conduct direct public offerings by filing a registration statement with the SEC to sell shares themselves.
There are alternatives to embarking upon a full-fledged IPO or DPO, and even alternatives to assuming public status as an SEC-reporting entity upon completition of a going public transaction. If it wishes, a company can move up the ladder in stages, assuming more visibility and more responsibility as it feels prepared to do so.
Cromwell Couslon Speaks
A few months ago, OTCMarkets founder Cromwell Coulson gave testimony at a House of Representatives subcommittee hearing entitled “Reducing Barriers to Capital Formation.” Among other things, Coulson enumerated reasons for going public and explained how the going public process can be made easier for microcaps through the use of what he calls the “Slow PO.”
Coulson listed the following benefits of going public:
Visibility – A company that goes public has a higher profile than a private company. The media are more likely to pay attention to a public company because information about it is readily available and easy to find. It also “creates a connection with investors, employees, strategic partners and customers that is invaluable to a growing organization.”
Liquidity – When a company’s shares are publicly traded, they have a realizable value, and can also be used as collateral, which is advantageous to investors. Property is more valuable if it is transferable.
Valuation – Private businesses are difficult to value. As Coulson puts it, “By making shares publicly traded, in a continuous market accessible through any broker, companies create a huge wealth effect as their investors have a readily transferable asset that can be deposited in brokerage accounts.” Public trading also gives a company an accurate indication of its own value, as the market determines pricing by reacting to news and other disclosures.
Capital – Public companies can raise capital far more easily than private companies, by floating initial or secondary public offerings, or by conducting private placements. Investors will be eager to participate because they know they can find buyers for their shares if and when they decide to sell.
Trust – Publicly traded companies make disclosure of financial and other material information. Coulson believes that the trust this engenders makes them “more sustainable and enduring than private companies.”
For businesses that want to enter the market by stages, Coulson proposes an alternative public offering that he calls the “Slow PO.” He suggests that a company can begin on the Pink Sheets, without reporting to the SEC, then subsequently become an SEC-filer, and finally, if it wishes, move to a national exchange if it meets listing requirements.
He points out that the Nasdaq went public though a Slow PO. In 2000, it made a private placement offering to NASD members. When the Rule 144 holding period expired, it filed a Form 211 to gain compliance with Rule 15c2-11 and began trading on the Pinks. Three years later, it did a secondary offering and uplisted to its own exchange. OTCMarkets went through the same process, initially trading as a Pink, and then qualifying for its own OTCQX marketplace, its highest tier.
As any qualified securities attorney knows, this process is available to any private company, even the smallest. All that’s needed is to begin with a Regulation D private placement, in which shares are sold to friends, family, and other interested participants willing to wait a year to trade. When the holding period is over, the company finds a sponsoring market maker willing to file a Form 211. Once the 211 has passed the Financial Industry Regulatory Authority’s (“FINRA’s”) comment process, the company can apply to FINRA for a ticker symbol and begin trading as a Pink. It can choose among several OTCMarket tiers, depending on the level of disclosure it is prepared to make.
As the company grows and gains confidence, it is free to become an SEC reporter, with the prestige attaching to that status, by filing an initial registration statement—usually a Form S-1—with the agency. If its success continues and it satisfies requirements, it may eventually decide to list on an exchange such as the NYSE MKT (formerly AMEX) or the Nasdaq.
By using this approach, a young company can avoid biting off more than it can chew, taking each step when it feels ready to do so without overreaching.
It’s one way of accomplishing the objective of going public; one that Coulson heartily recommends. Of course, if the company would rather not wait a year before making its public debut, it can proceed directly from a Regulation D private placement to the filing of an S-1 registration statement. If all goes well, the S-1 will be deemed effective, and the private placement stock registered and ready for trading, in the space of three or four months.
The choice is the company’s, but should be made with the help of an experienced securities attorney. Going public is a big step, and it needs to be done properly, no matter what method is selected.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
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Brenda Hamilton, Securities Attorney
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