If you are considering taking your company public in the form of an initial public offering (“IPO”), there are many factors that you should consider before making that decision. In fact, many investors and attorneys agree that planning for an initial public offering should begin at a minimum 12 to 18 months prior to your anticipated offering.
Often times the registration process that you need to complete will take around 4 to 6 months or longer, depending on your company’s particular circumstances. One of the first, and likely most important, factors to consider prior to taking you company public is what your company’s value is to investors.
Before going public, it is important that you determine your company’s value. Often times the best way of accomplishing this task is by finding out which of your competitors have gone public, and how their shares have performed.
Further, if you would like people to invest in your company, you will need to provide them with pertinent information in order to capture their investment. The information provided should include an estimate of the rate at which your company will grow, as well as supply them with the numbers that support that growth.
Further, if you would like to receive constructive criticism on your initial public offering prior to taking your company public, you may wish to consider participating in the program created by the Jumpstart Our Business Startups (“JOBS”) Act. The Jumpstart Our Business Startups Act is a law that was passed in April 2012 by the federal government.
The law permits companies to secretly file for their IPOs, receive feedback from the SEC, and hold meetings with possible investors. This law serves to allow business owners to “test the waters” before entering the public stock market, and avoid spending over $100,000 simply to determine whether there is enough interest in their stock offering.
Prior to the passage of the JOBS Act in 2012, business owners were forbidden to speak with potential investors until after they filed their IPO documents. Thus, they were required to spend hundreds of thousands of dollars on legal fees, due diligence, compliance, and accounting before even having a chance to communicate with possible investors.
Because of the Security and Exchange Commission’s (“SEC”) many reporting requirements, it is advisable that you employ the services of both an investor specialist and an initial public offering attorney who is well versed in SEC reporting.
Further, if you plan on offering stock options to employees, a useful tactic to promote loyalty, then you should also consider hiring a human resources professional with experience in creating that type of benefit package.
Next, if you decide to take your company public, as a public company your board of directors will now be in the public eye. This means that you should consider your current board of directors and start the process of identifying and recruiting new board members before filing for an initial public offering.
It is imperative that you align yourself with the right people for performing the particular tasks needed to operate a public company. Thus, new members of the board are also people that you should consider hiring to assist with your company’s initial public offering.
Further, although many companies outsource the communications function of the company, i.e. communicating and interacting with the media and investors, hiring a communications director in house may be more beneficial to you.
As of April 2013, the SEC allows companies to utilize social media more than previously allowed; companies are now allowed to make major announcements via social media platforms, so long as they first notify investors. Therefore, having a communications director and team that is well versed in social media, may also be extremely beneficial to you.
Once again, you should know that the process of taking a company public is time consuming, complicated, and often expensive. However, there are many advantages of taking your company public including:
- Increased Capital: The main reason that companies go public is to raise capital to use for various business purposes including: marketing, working capital, research and development, purchasing equipment, etc.;
- Liquidity and Proper Valuation: Once your company goes public and it’s shares are traded on the public market, those shares have a value that can be easily resold. Companies can then attract employees by offering stock benefits or attract confident investors through the active trade of company shares.
- Further, you company will now have a more accurate valuation, less subjective than that of a private valuator. A high valuation will attract more investors and allow your company to expand through acquisitions or mergers; or
- Publicity: One major benefit in taking you company public is that your company will become better known and more visible than when it was private. Thus, your company will likely gain an increase in it’s reach and market for company goods or services.
As can be seen there are many advantages of going public, but there are also disadvantages including:
- Expenses (Time and Money): As noted above, taking your company public is very time consuming and expensive. Typically, an IPO takes at least a year to complete and several hundreds of thousands of dollars in legal and accounting fees. It is important to make sure that your company can afford the time and expenses necessary, before going public;
- Disclosures and Regulatory Reviews: The SEC has very extensive disclosure rules. Thus, once your company is public, it’s books will be more open and more heavily audited than they were before.
- Financial disclosures are required by the Securities and Exchange Act of 1934, and those disclosures include quarterly financial statements and annual financial statements. Further, the company will be open to review by the SEC, at any time, to ensure that the company is making all the aforementioned disclosures and appropriate filings;
- Vulnerability: Once your company goes public, you are more vulnerable. This means that if your stock price begins failing the market may lose confidence in your company and your company’s valuation and your pool of investors will suffer. Further, if you offer a large amount of your shares to the public, you open up your company to being taken over by a larger company.
When taking your company public, it is in your and your company’s best interest to consult a well qualified and knowledgeable business attorney who can assist you throughout the entire process. An experienced business attorney can draft investor agreements between you and investors who purchase stock in your company, as well as ensure that all of your company filings are appropriate.
Further, they may be able to review your company’s annual report required by the SEC, which consists of several financial disclosures and statements regarding your company’s performance and goals.