• Describe the going public process, what are the pros and cons?

The success of every entrepreneur is in the event of taking his/her business public. It refers to the first sales of stock to public by the private company (commonly known as an IPO) which signals the world that the business has made it. An IPO can not only provide a company with access to capital to fuel growth and liquidity for founders and investors, but it provides the public market’s unofficial stamp of approval.
The new amendments in the 2002 Sarbanes-Oxley have depicted the new meaning to the term IPO. It’s not just a public offering of stock, but it can also be an intensely arduous and increasingly expensive ordeal. In order to gain the benefits of raising capital and achieving greater liquidity that an IPO offers, companies must be more solidly established and better able to pass tougher regulatory requirements than in the past. Doing so comes with a bigger price-tag than ever before. These days, companies going public should expect to pay more than $2 million in out of pocket expenses to cover a host of fees – among them legal, accounting, printing, listing, filing in addition to the underwriter discount and commission of 7 percent of the offering proceeds and to shore up internal processes to meet the typical reporting and governance standards for public companies.

Process of Going Public

The following three ways can best explain the process of how a private company can go public:

  • Initial public offering.

For a traditional IPO, a company is required to engage underwriters, drafts and files a registration statement with the Securities and Exchange Commission (the “SEC”) in which it makes required disclosures about its business and finances, conducts a road show with its underwriters, generally targeting institutional investors, and prices and closes the offering following the SEC’s declaration that the registration statement is effective. In addition, the company lists its securities on an exchange or NASDAQ in order to provide a liquid trading market for its stockholders.

  • Rule 144A equity placement.

Under this method a company sells equity securities to large institutions known as qualified institutional buyers. The QIBs then trade these securities among themselves on an exchange. As a condition to the QIBs’ purchase of the securities, however, the company will agree to file with the SEC and seek effectiveness of a registration statement (typically within six to twelve months after the closing of the initial purchase) that registers the privately placed securities for resale to the public. The company will become a publicly reporting company on the completion of registration statement under the Securities Exchange Act of 1934, and may, if it chooses, seeks to list its securities on an exchange or NASDAQ. The initial phase of this rule resembles the process involved in an IPO, and the offering documents contain all of the information that would be required in a prospectus for a traditional IPO. Importantly, however, the offering documents in a Rule 144A equity placement are not filed with the SEC and, thus, the company obtains the proceeds of the offering more quickly.

  • Reverse merger.

In a reverse merger transaction, a private operating company merges with a public shell company (which is a term used to describe a company that files reports under the Exchange Act and whose stock may even be traded in the Pink Sheets or on the Over-The-Counter Bulletin Board, but that has no or nominal operations or operating assets). Upon the merger, the combined company is a reporting company under the Exchange Act, and, within four days of closing, must file a Current Report on Form 8-K containing information and disclosures, including financial information, similar to the information a company discloses in connection with a traditional IPO. As a result of the transaction, the combined company has access to the public capital markets and, if it meets the applicable listing standards, can seek to list its securities on an exchange or NASDAQ.

Advantages:

  • Raise capital. A company that completes a traditional IPO will raise a significant amount of capital that it can use in its business operations or for other disclosed purposes.
  • Provide liquidity to current stockholders. The listing of the company’s stock on an exchange or NASDAQ will create an active trading market and provide an avenue to liquidity for current stockholders, who may have been invested in the company for a substantial period of time.
  • Future access to capital markets. Having an established market for its stock will provide a company with name recognition, as well as a readily ascertainable market value for its stock. This will often make it easier to raise additional capital in the future as needs arise.
  • Acquisition currency. A liquid stock can also provide currency for making acquisitions, thereby saving the company’s cash for other purposes.
  • Employee incentives. Companies with a market for their stock have a greater ability to incentivize employees through equity grants.

Disadvantages:

  • Public company costs. Upon completion of a traditional IPO, a company will incur all of the current and ongoing costs of being a publicly reporting company, including the costs of complying with its Exchange Act reporting obligations and with applicable provisions of Sarbanes-Oxley. It will also need to comply with the listing standards of its chosen exchange or NASDAQ.
  • Disclosure obligations. As part of its Exchange Act reporting obligations, the company will be required to make extensive disclosures about its business and operations, and provide detailed information about the compensation of its directors and officers, related-party transactions, and other matters. In addition, a company’s directors, officers and affiliates will become subject to complex filing obligations and trading restrictions under Sections 13 and 16 of the Exchange Act.
  • Increased risk of legal exposure. The company and its directors and officers will be subject to potential liability under the federal securities laws for material misstatements or omissions in its SEC filings and other public disclosures. In addition, the duties and other obligations of the company’s board of directors and officers, and their susceptibility to claims for breaches of such duties, will increase substantially.
  • What are the pros and cons of remaining independent? Selling the company? Going public?

The founders of the company have three options to undertake. Let’s take one by one to study their pros and cons.

Option 1) Going Public

If the company opts for going public the pros and cons attached with them are as follows:

Pros

  • Instant capital funding: For the managers to undertake the future potential projects the company through the initial public offering can gain a lot capital from the shareholders instantly and the problem of cash shortage will not exist.
  • Managers remain in control over company: The managers of the company will remain in control of the company and their check and balance can also be done which will ensure their work in the best interest of the company and the shareholders.
  • Create brand awareness: Currently the prime concerns of the CEO of the company is the focus on the advertising and marketing part of the products so by going public this task can be easily achieved in the best way…….

 

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