Taking Your Company Public
Taking Your Company Public
Taking a company public can be a complicated process, and many options should be weighed carefully. However, there are advantages to going public, and the process can be rewarding for both small and large companies.
Why Go Public?
Most companies go public to raise capital through the sale of stock or by issuing bonds. Many potential investors will never invest in a private company because the offered stock is not liquid. Publicly traded companies offer a liquid investment, reducing the investment's risk. These investments can bring immediate income to a publicly traded company which can be used for numerous purposes, such as paying off debt, expanding the company, or marketing and development. A publicly traded company can also return to the market for additional capital by issuing a bond or a convertible bond (a type of bond that can be converted into shares of stock) or through a secondary stock offering.
Being a public company also gives both companies and their founders a sense of prestige, which may increase business or financing opportunities. And when a company's stock is sold initially, the company receives additional publicity, not only in its regional area but around the world, a valuable marketing tool for any business. Public companies can also use stock options to attract and retain quality employees. In addition, owning stock options give employees a formal stake in the company.
Finally, going public provides the owners and founders with an exit strategy by allowing them to sell their ownership holdings in the business. Basically, public companies are generally worth more than private companies.
There are disadvantages to going public. Not only must profits be shared with investors, there is less confidentiality because public companies must adhere to the numerous financial reporting requirements by the Securities and Exchange Commission (SEC). Shareholders must be informed about the company's management, business operations, and financial conditions, which will incur additional costs and legal obligations. In addition, shareholders must approve management's actions, creating an inflexible environment for those in charge. Going public is also costly, not only because of all of the filing requirements but also because of the unlimited liability placed on those involved, as anyone engaged with a public company is liable for each others' actions.
How Do I Go Public?
Below is a brief list of factors that should be fulfilled if, after weighing all options, you decide to go public:
1. Assemble your professionals, including an accountant, attorney and underwriter. Have them meet with your officers and directors to discuss your goals for going public. In addition, have an independent auditor audit your financial records.
2. File a registration statement and related documents with the SEC, as required by the Securities Act before securities are offered for sale to the public. You cannot sell the securities covered by the registration statement until the SEC declares it "effective," even though registration statements become public immediately upon filing.
Registration statements have two principal parts:
- Part I - This is the "prospectus," which describes the important facts about the business operations, financial condition and management. All investors, as well as anyone who has made an offer to purchase securities, must have access to the prospectus.
- Part II - This contains additional information that the company does not have to deliver to investors. Anyone can see this information by requesting it from one of the SEC's public reference rooms or by looking it up on the SEC Web site.
There are other forms that must be completed and filed during the process of going public. For example, Form S-1 is used to register their securities offerings. To raise less than $10 million in capital, Form SB-1 is used, and Form SB-2 is used by those wishing to raise an unlimited dollar amount of capital.
3. File any required state and National Association of Securities Dealers documents. A final agreement can be signed with the underwriter, and an escrow account can be established to deposit money that will be distributed at closing.
4. Distribute Part I of the prospectus to prospective investors and print stock certificates.
5. You can now price and announce your offering and seal the deal.
Please note that the steps listed above are the principal steps that must be completed to bring a company public. For more specific information on going public, visit the U.S. Securities and Exchange Commission's Web site at www.sec.gov.