Many private companies consider going public at some point in their business growth strategy. On the surface, this sounds like an exciting idea, and becoming a public company does offer some advantages. However, the transformation from a private to public company is a very detailed process. There are many financial, business and strategic factors that must be taken into consideration when making this decision.
A company “goes public” when it sells securities, usually in the form of shares of common stock, to the general public for the first time. These shares are then traded through an investment banking firm on a recognized stock market or listing. Such a sale requires the company to file a registration statement with the U.S. Securities and Exchange Commission (“SEC”) in accordance with the Securities Act of 1933. While securities may be sold to the general public by other means, the term “going public” refers to those instances where a 1933 Securities Act filing is required. The process is also called the “initial public offering” or IPO.
There are several advantages a company can experience when going public. Greater access to capital is the most distinct benefit. It is also a sign of success, credibility and accomplishment. IPOs can generate publicity for the company and increase public awareness. Future stakeholders might consider this achievement important if they are looking to transact business with the company. Additionally, it can provide an easy vehicle for a liquidity event for the company’s majority owner(s) if and when they decide to “cash out.”
Once a company makes a decision to go public, the following questions must be considered in order to move forward:
An elaboration on some of the above points follows:
If the company is considering an initial public offering, it must determine whether to invite several investment banking firms or underwriters to meet with the company and submit proposals. From this process, an underwriter will be selected, and an underwriter agreement will be signed.
Going public involves the preparation of a registration with the SEC that must be approved by them and declared effective before the stock is actually sold to the public. The SEC does not evaluate the merit or value of the securities that it reviews. It only determines whether the disclosures made in the registration statement and the prospectus are complete and clear enough to give the investor adequate information. Writing the registration statement to comply with SEC requirements is a team effort of management, underwriters, attorneys and accountants. This is usually the most time-consuming step in the process of going public.
A closing is held after the registration is declared effective by the SEC, and the offering commences. The underwriters typically remit the funds to the company once they have received the funds from their customers for the newly-sold securities. The financial costs of becoming a public company should also be considered —both initial and recurring. These expenditures include the following:
Becoming a public company can be an exciting and —down the road —a worthwhile endeavor. However, for any company considering going public, the decision should not be taken lightly. The costs, time and effort required for the initial closing must be evaluated when making the decision and thereafter in order to maintain compliance with SEC regulations.
© 2012 WithumSmith+Brown, PC
Bob is a partner in the firm’s Technical Resources Department. He is a licensed certified public accountant in the state of New Jersey and has over 20 years of experience in private and public accounting.