Three Ways to Take a Company Public: IPO, DPO, and Reverse Merger

Full Transcript

Welcome to Securities Lawyer 101, the podcast from Hamilton and Associates Law Group in Boca Raton, Florida. The firm was founded in 1999 by securities attorney Brenda Hamilton and has advised more than three hundred companies on going-public transactions. Today we're looking at the three main roads a private company can take to become publicly traded, and how to think about which one fits.

The first road is the initial public offering, or IPO. In a traditional IPO, the company works with an investment bank that acts as the underwriter. The company files a registration statement with the Securities and Exchange Commission. The SEC staff reviews it and sends comments, the company responds, and once the registration statement is declared effective, the underwriter sells shares to the public. An IPO can raise significant capital and often comes with a listing on a national exchange. It is also typically among the most expensive and time-consuming route. Underwriting fees, audit costs, legal fees, and months of preparation add up quickly.

The second road is the direct public offering, or DPO. In a DPO, the company sells its shares directly to investors without an underwriter. The company still has to register the offering, usually on Form S-1, or rely on an exemption such as Regulation A. A DPO can cost less and can give management more control over pricing and timing. The trade-off is that the company has to find its own investors. And without an underwriter behind the deal, building a trading market afterward takes deliberate work, including finding a market maker willing to quote the stock.

The third road is the reverse merger. Here, a private company combines with a company that is already public, often a shell company with few or no operations. The private company's owners typically receive a controlling or substantial ownership position in the combined company's shares. A reverse merger can be faster than an IPO, but it is not a shortcut around the rules. The combined company has to file detailed disclosure with the SEC shortly after closing. Shareholders face extra limits on reselling shares connected to a former shell. And the major exchanges have additional listing requirements, including seasoning requirements in some circumstances, that reverse merger companies must satisfy before they can list.

There are other paths too. A company can merge with a special purpose acquisition company, or SPAC, a blank check company that has already raised money in its own IPO in order to acquire an operating business. SPAC transactions come with their own SEC rules and disclosure requirements. A company can also register a class of stock on Form 10, or raise capital under Regulation A, and we'll cover those in later episodes.

So how do you choose? Start with three questions. How much capital do you need, and when do you need it? How much can you afford to spend getting public, and then staying public? And where do you want your stock to trade, on a national exchange like Nasdaq or the New York Stock Exchange, or on the O-T-C Markets? Honest answers to those three questions usually point toward one path.

Whichever road you take, ongoing public-company obligations remain. Depending on the company's reporting status and trading venue, those obligations can include annual and quarterly reports, disclose material events, and meet governance standards. Going public is not a single transaction. It's a new way of running your business.

One useful way to compare these paths is to separate the transaction from the market that follows it. An IPO includes both a registered offering and, in many cases, an exchange listing. A direct public offering may register an offering without guaranteeing that an active trading market will develop. A reverse merger can make a private operating business part of a public company, but the merger itself does not raise capital and does not guarantee liquidity. A SPAC merger can bring capital and a public listing, but redemptions, financing conditions, shareholder approval, and extensive disclosure can change the economics before closing. The label alone never tells you the full result.

The people involved also differ by route. An underwritten IPO centers on the company, its underwriters, securities counsel, auditors, and the exchange. A direct offering puts more responsibility on the company to identify investors and manage distribution. A reverse merger adds diligence on the public shell, its former owners, transfer agent records, liabilities, and filing history. A SPAC transaction adds the SPAC sponsor, public shareholders, and often a separate private financing. Each additional party creates another timeline, another diligence process, and another potential closing condition.

Before selecting a route, management should ask counsel for a written transaction map. It should identify required audits, SEC filings, shareholder approvals, financing needs, exchange or quotation requirements, expected costs, and post-closing reports. That map makes it easier to compare real execution risk instead of choosing the route that merely sounds fastest.

That's it for this episode. If your company is thinking about going public, call Hamilton and Associates Law Group at five six one, four one six, eight nine five six, or visit Securities Lawyer 101 dot com to speak with a securities attorney. This podcast is for general information only. It is not legal advice, and listening does not create an attorney-client relationship. Securities rules change, so speak with qualified counsel about your specific situation.