What does every growing business need? Money. And these days, finding that money is becoming more and more challenging for young and established companies alike.
The main reason many companies decide to go public is to raise money — a lot of money. Money raised can be used to fund research and development, fund capital expenditure, obtain contracts or even used to pay off existing debt.
Another advantage is an increased public awareness of the company. Public companies generate publicity through professional financial public relations campaigns. Companies engage public relations firms who specialize in maximizing the awareness of the new public company to the investment community. These firms make the company, management team and products known to a new group of potential investors, who can then buy the company’s shares through their stockbroker or directly through one of the online brokerage services such as E*TRADE or Fidelity.
The more people who hear about a public company (assuming they like ‘the story’), the more they are likely to buy the company’s shares. Generally speaking, the more people who buy your company’s shares, the stronger (increased value) the company’s share price. But, the opposite is also true. So, while good news about a company may encourage new investors to buy shares, bad news may cause investors to sell their shares. It’s really a supply and demand situation. More shares being offered for sale by investor usually lowers the share price. On the other hand, when lots of investors are trying to buy the shares of a company, the price of those shares usually increases. Doesn’t always happen like this, but more often that not it does.
Going public also may be used by founding individuals and shareholders as an exit strategy. Many early stage investors have used the going public method to cash in on successful companies that they helped start-up.
Taking your company public will involve filing relevant documents with securities commissions such as the Securities and Exchange Commission (SEC), State and/or provincial regulators. You will need to adhere carefully to various securities regulations.
Going public via an initial public offering is available to companies of all sizes, but to do so you will need to find an underwriter. Practically speaking, a small company will find it almost impossible to find an underwriter in the US or Canada.
Although underwriters and public investors are very interested in concept and start-up companies, lately this interest has all but disappeared. Underwriters now demand solid proof of a successful business before they are willing to back any company, regardless of size or industry.
However, small companies in the US can raise money and go public through Regulation A, which I wrote about here.
Some companies decide to do a direct public offering, which is a tried and tested method to raise capital. The New York Times wrote about a number of successful examples. If your business is involved in humanitarian or sustainable efforts, then Cutting Edge Capital may be a good fit to advise you about a direct public offering.
Going public via a reverse takeover remains a popular method for small companies to go public and create a trading market for their securities.
A reverse takeover is where an operating private company merges into or is acquired directly or indirectly by a public company that is seeking a new business. The value of the public company is usually because its securities are listed or quoted for trading on one of the major stock exchanges such as the NASDAQ or OTC Markets.
A reverse takeover may take less time to complete than an initial public offering, a direct public offering or filing a registration statement with the SEC. And with a reverse takeover, you are in control. There is no need for an underwriter to be involved in a reverse takeover and there is often less dilution of ownership.
Usually, there are wide variety of public companies available in the US and Canada that would be suitable for a reverse takeover.
The legal rules to complete a reverse takeover vary depending on the regulatory jurisdictions involved, the number of stockholders in both companies, the stage of development of the operating company and whether the public company is current in its regulatory filings. Reverse takeovers can become quite complicated particularly when national borders are crossed and certain exchange rules apply. You must comply with all applicable securities law when completing a reverse takeover, so please consult with an experienced Securities Attorney.
There are many advantages for a Company going public. In addition to being able to raise money and the prestige a company gets when their stock is listed on a stock exchange, other advantages for the company include:
• Offering your early investors and shareholders an exit strategy
• Companies can offer securities in the acquisition of other companies
• Stock and stock options programs can be offered to potential employees, making the company attractive to top talent
• Companies have additional leverage when obtaining loans from financial institutions
• Market exposure – having a company’s stock listed on an exchange could attract the attention of large venture capital firms, mutual and hedge funds, market makers and institutional traders
• Indirect advertising – the filing and registration fee for most major exchanges includes a form of complimentary advertising. The company’s stock will be associated with the exchange their stock is traded on
• Brand equity – having a listing on a stock exchange also affords the company increased credibility with the public, having the company indirectly endorsed through having their stock traded on the exchange.
If you are planning to go public, you should arm yourself with as much information as possible about your choices. You want to make the best decision for your company, your shareholders and your circumstances.
Early in the going public process, take advice from someone who has taken a company public before. Don’t assume you can find all the information on the Internet. Hiring a good business consultant to help you through a going public transaction may actually save you money, time and trouble down the road.