Going Public in 2015
For many private companies, “going public” is about more than just raising capital. It’s a sign of accomplishment. Direct public offering (“DPO”) have replaced Initial Public Offerings as a means for small businesses to obtain public company status. A DPO not only provides a company with access to capital but it provides liquidity for founders and investors.
But going public isn’t for everyone. Going public has become an arduous and increasingly expensive undertaking. In order to gain the benefits of raising capital and liquidity that a DPO offers, companies must be able to comply with the SEC’s regulatory requirements and afford the costs of the DPO undertaking. This blog post details the pros and cons of going public, the qualifications a business needs to go public, and the steps involved in the DPO process.
A successful DPO is one of the most significant events in the life of a business. The capital raised through a successful public offering can allow a company to expand into new market that were not available without capital. A successful DPO can help a company attract new employees and management with stock options and other stock based awards. Public company status opens doors that might have otherwise been closed but, with costs.
The Advantages of Going Public include:
• A registered DPO combined with a secondary or resale registration, if structured properly, can enable the company to provide liquidity to founders or other shareholders by registering the resale of their shares.
• The higher valuation of a public company in comparison to a private company, increases access to capital.
• A company’s first DPO may be expensive and time consuming if there is a market for the company’s securities, it can register a second offering efficiently and quickly as a seasoned issuer.
• The increased liquidity can help a company attract skilled management and employees by enabling it to grant stock options or stock awards.
• A DPO can create a form of currency-stock can be used in acquisitions and increase a company’s valuation if it becomes a target for an acquisition.
• The act of going public can also serve as a marketing event for a company, to drum up interest in the business and its products or services.
Disadvantages of Going Public include:
• The biggest downside to going public has become the cost of regulatory compliance.
• A drawback for small companies is often the loss of control over the company.
• The SEC requires public companies to provide transparency to investors and shareholders through their public filings. This may mean providing sensitive information about products, technologies, contracts and/or management a private company would not reveal.
• The Company and its management can become subject to regulatory and/or civil actions if it fails to comply with the technical requirements of the securities laws.
If a company can meet the financial requirements for going public, it should determine whether n DPO will help it meet its operational and business objectives, and if the market conditions are favorable, it should prepare for the DPO process. Typically, it takes three to six months to complete the DPO process, from the time the company engages its going public securities attorney to the time it completes the DPO.
The key steps in a registered DPO going public transaction are summarized below.
The demands of becoming a public company status often require additional management personnel with considerable financial and accounting experience to complying with the SEC’s financial and accounting requirements. In light of this, companies should seek a Chief Financial Officer or other executives with experience in public company reporting.
The Financial Industry Regulatory Authority (“FINRA”) requires that a company’s securities develop an orderly and liquid market. To meet this requirement you must have a shareholder base of at least 20 non-affiliated stockholders who have somewhat evenly distributed share ownership. For example, if a large portion of a company’s free trading shares is concentrated in only a handful of shareholders, FINRA will not likely assign a ticker symbol. Public float concentration is a red flag that often results in one or a few stockholders manipulating the market.
Going Public: Financial Reporting Systems
A company going public with a registered DPO must provide their financial statements. These are typically prepared by an outside accountant. Once complete, an auditor must audit the financial statements prepared by the company and/or its accountant. Before going public, private companies should evaluate their financial systems to ensure they have proper systems to compile and accurate and timely financial and other information.
A direct public offering includes the filing of a registration statement with the SEC. The issuer must include audited financial statements its two preceding fiscal years or shorter period that it has been in existence. As soon as a decision has been made to go public, the company’s accountant should begin the process of preparing its financial statements and the company should elect its auditor who must be registered with the Public Company Oversight Accounting Board. The Company’s accountant should provide GAAP-compliant financial statements and the footnotes to those financial statements to the Company’s auditor. The auditor must audit those financial statements and prepare an independent opinion on whether or not the financial statements are accurate, complete, and fairly present the company’s financial condition. The auditor is prohibited from preparing the financial statements for the issuer whose financial statements it audits.
A registered DPO involves the filing of a Form S-1 with the SEC. The company’s going public securities attorney is critical to the registration statement process. The Form S-1 is an expansive disclosure document. Having the right going public lawyer can ensure that the registration statement meets the SEC’s requirements in a timely and efficient manner. Once a draft of the Form S-1 is completed, the company will file the registration statement with the SEC. While immediately available to the public on the SEC’s EDGAR database, the draft registration statement is subject to SEC review and comment. Almost invariably, the SEC reviews an issuer’s direct filing and typically provides extensive comments within 30 days of the direct filing. Once the company has responded to all of the SEC’s comments, the SEC will declare the registration statement effective.
FINRA frequently questions whether a company is a shell during the Form 211 comment process. This is particularly true for companies that do not have meaningful revenues. The OTC Markets remains a ripe playing field for fraudsters setting up shells for reverse merger transactions. As such, when FINRA sees a company that looks like it is being set up as a shell, it will render comments and you should be prepared to prove that the company has a legitimate plan of operations. Prior to FINRA allowing a market maker to submit quotations, an issuer should ensure that it is prepared to provide proof to FINRA that it is not a shell company.
To initiate quotations of a company’s securities in the OTC Markets, a sponsoring market maker must submit a Form 211 application to FINRA. Market makers are prohibited from being compensated to submit a Form 211 to FINRA. Rule 15c2-11(a)(5) of the Securities Exchange Act of 1934, as amended requires that sponsoring market makers perform sufficient due diligence before submitting a Form 211 to FINRA.
The due diligence often includes copies of subscription agreements for each stockholder and the front and back of checks evidencing payment. Some may require copies of driver licenses, questionnaires and other materials. As such, companies should keep meticulous records of all offerings conducted.
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]. 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 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.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855