By Larry Washor
We live in a world where going public is the Holy Grail of company development. Accordingly, there are many practicing securities lawyers who have the technical skills necessary to take a company public. Experienced securities lawyers generally ask their clients certain questions prior to taking the client’s retainer check. The purpose of this article is to set forth the basic issues which should be asked and considered.
The first question to be asked is why does the company want to go public? There are many good reasons to go public, but there are also many bad reasons. Among the bad reasons are that being public will raise money for the company and that there is huge prestige in being public. Unfortunately, being a public company does not cause large hordes of investors to rush forward to hand money to the company. Recently, I have been consulted by two companies that have been taken public by a technically competent securities law firm without a viable plan to raise capital. Both companies quickly failed. Unfortunately, being a newly public under-capitalized company generally leads to the company’s failure. As to the prestige of being public, a company cannot be built with prestige alone.
Furthermore, once a company has determined its reason for going public, the company must determine any steps necessary to maximize the company’s position in going public and the right time to go public. In other words, before going public, a company should consider whether there are any negatives that can be corrected or improved, whether to strengthen the company through adding new management or advisors, and whether there are any positive developments that can be finalized prior to going public?
The second question is how does the company intend to raise the capital necessary to build a business? There are many ways to raise funds, including private placements, public offerings, crowd funding, and the use of venture capital and investment banking professionals. Being public can provide an exit strategy for many investors, giving them a sense of comfort with the company. On the other hand, most venture capitalists and investment bankers, would prefer that the company not be public when they start to work with the company. However, a company should understand the purpose that going public serves in its overall development plan before doing so.
The third question to be asked is whether the client is aware of the cost of going public? For example, just acquiring a quality shell to go public through a reverse merger, should cost anywhere from $250,000 to $350,000. Even a quality pink sheet show is running $150,000 to $200,000. Additionally, there are related attorney’s fees and accounting fees which can be quite expensive. An initial public offering will generally exceed $150,000 in legal, accounting, and filing fees. Therefore, a company needs realistically to plan where, and when, the necessary capital will be obtained since going public cannot be paused due to a lack of funds.
Going public requires an understanding of the company’s growth strategy and business model. In short, it is important to know what can be done, but it is more important to know what should be done.
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