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IPO: The Benefits of an Initial Public Offering
In an IPO, also known as an Initial Public Offering, a private company that wishes to become publicly traded in the stock market acquires a listing on an exchange and at the same time offer's its shares to the general investing public for the first time ever. Investors of all size and stripes can purchase stock in the company and partake of the businesses' growth and profits. Becoming a publicly traded concern announces to the world that the company has made it, it is saying "we have arrived!"
Preliminary Considerations Before Undertaking the IPO Process
These are the most salient points for a business to consider
before it commits to the rigours associated with most Initial Public Offerings,
since even if a company meets the minimum requirements to trade in a particular
stock market or exchange, it may not be the best time to do so. Furthermore,
timing and market conditions may not present the most advantageous circumstances
for the company to become a publicly traded enterprise.
a) Does the company have the right heft to do the Initial Public Offering? Many companies do not have enough market capitalization to guarantee their investors a true "liquid" stock.
b) Are the market conditions suitable for the particular public offering? Is the general market feeling good and are investors hungering for new market opportunities? These are serious considerations because at best you want the company to start trading in an upbeat market.
c) Does the company have the right management team in place? Remember, this procedure can be a very complex and time consuming endeavor that should only be undertaken using the services of an experienced and competent professional corporate development expert.
Equity Capital: The Best Reason for Initial Public Offerings
Of course, when a private company decides to undertake the processes involved with Initial Public Offerings it does so with an over-arching reason: to attract growth capital. Not only will the sources of available capital be much greater than what's presented to private companies, but prove to be the very best type of financing, since equity capital doesn't ever need to be repaid.
Items Up for Review Before Making the Decision to do an IPO
The act of becoming a publicly traded business in the above
manner, via Initial Public Offerings, also demands a sober assessment of the
given company's readiness to undertake the procedure, since upper management
will have extra demands upon its time and resources. Furthermore, it can't be
overstated that the planning, preparation, and management of the public offering
will be a challenge for the particular enterprise.
Not only is the IPO a very expensive process, but there are a host of other considerations and expenses to deal with, such as legal, printing, listing fees, accounting and financial reports, not to mention the cost to underwrite the offering and the resulting commission fees. The need for extra company resources to cover the expenses associated with stricter reporting requirements, such as the Sarbanes-Oxley Act of 2002, and the corporate governance necessities native to public companies are pertinent considerations as well.
The Most Favorable Aspects of an IPO (Initial Public Offering) are the
● Greater access to more sources of capital
● Cheaper cost of acquiring growth and expansion capital
● The use of stock options to attract and retain company officers and key personnel
● The public image of the company is enhanced with greater prestige
● The company stock can be used for Mergers and Acquisitions
● Provides an exit strategy for the early investors
These Are Some of the Drawbacks of Initial Public Offerings:
● Dilution: Present shareholders will see their ownership of the company shrink.
● Loss of control: The company could experience a hostile takeover attempt.
●The company will have to spend resources reporting to the government and to comply with the
requirements of the Exchange Act of 1934
●The Prospectus and other filing documentation required by the SEC (Securities and Exchange Commission)
will reveal company information formerly not available to competitors.
● Events that used to be private, such as executive compensation and other company procedures,
will now be subject to review and perhaps condemnation from shareholders and investment professionals.
●The company's management could forgo long-term strategic planning in favor of short term profits to
protect the bottom line.
Qualifying the Company for the Stock
Depending on what exchange the company wishes to trade in, there could be listing requirements
particular to each of the boards. As an example, the NYSE (New York Stock Exchange) requires at least $10 million
in earnings – before taxes – for at least 3 years.
Other exchanges, such as the NASDAQ (National Association of Securities Dealers Automated Quotation), requires combined earnings of at least $11 million in the 3 years preceding the listing application to join their Global Select Market. The AMEX (American Stock Exchange) requires earnings of at least $750K in the last year, or at least 2 out of the latest 3 years.
Valuating the IPO: Share Price, Investment Banks and Underwriters
Once the management team is in place you want to start the
process of engaging investment bankers and other valuation professionals to
underwrite the stock issue. Pricing the stock issue right will be an essential
requirement of the underwriting firm because you don't want the shares to be
priced so high it spooks possible investors, and likewise, you don't wish to
leave money on the table by too low a valuation.
The process of choosing the financial partners is predicated on their view of the company's prospects in the marketplace, prior experience helping similar companies raise capital by employing Initial Public Offerings, the personal chemistry between the bankers and the company's board and top executives. In the final analysis you want to deal with an outfit that believes in the offering's future prospects.
The Registration Statement
Once the company has finished engaging the corporate financing professionals and filed the Red
Herring – a preliminary type of prospectus - it is now considered to be duly involved in registration and beholden
to the quiet period that restricts what company officers can say and do outside of the specific confines of the
registration process involving the Initial Public Offering.
While the enterprise executes a formal filing with the SEC and awaits the conclusion of their review process and comments it can also proceed to have it's underwriters file the existing compensation agreement with FINRA (Financial Industry Regulatory Authority). Of course, as soon as the company files the statement it becomes available at the SEC's website via their EDGAR system (Electronic Data Gathering, Analysis, and Retrieval).
We look forward towards learning of any business that wants to be publically traded.