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Going Public

November 25, 2009

“Money often costs too much.”
Ralph Waldo Emerson

Deciding whether to “go public” is a far off dream for the beginning entrepreneur and an important decision for the already established and growing private company.

“Going public” is an expression that is used to describe the process in which a closely-held company offers its stock to the general public. A private company goes public when it sells stock to the general public for the first time by means of a registration statement filed with the Securities and Exchange Commission (S.E.C.).

In an initial stock offering the company can sell new shares of stock (called a primary offering) or existing stockholders can sell portions of their stock (called a secondary offering). While the shares in both cases are registered, the S.E.C. does not evaluate the merit of the offering. It merely determines whether the disclosures that have been made are sufficient for the general public.

While there are many great success stories about companies that have gone public, there are also many companies whose public offerings were more trouble than they were worth and others who had to abort the process before finishing. It is important for a company to fully understand the costs and benefits of “going public” prior to beginning the journey.

The primary obvious benefit is the receipt of the funds raised through the offering. The raising of capital through a public stock offering generally offers a higher valuation for your company and raises more funds with less dilution of ownership than other financing alternatives.

Once you have established a public market for your stock, you will have increased flexibility for your future financing needs. Your publicly traded stock should create greater visibility for your company. Your ability to attract and compensate key personnel will be enhanced.

Not an insignificant factor in evaluating “going public” is the impact on your personal wealth. You will have established a price and a market for your shares. By means of a secondary offering, current shareholders can diversify their holdings.

There are also some significant disadvantages associated with the transformation from a closely-held business to a public company. First, it is expensive. The commission of the underwriters who sell the stock will range from 6% to 10%. Additional expenses for legal, accounting and other professional fees can exceed $100,000 for a small to medium offering.

There will be a substantial increase in the amount of information that you will be required to disclose to the public. There is the potential for the loss of control of your business and there will be increased pressure for short term performance.

As a company grows, additional capital is needed to fund the growth. The more rapid the growth, the less likely internally generated funds will be sufficient to meet the company’s capital requirements. Going public is one way of obtaining the required capital.

While there is no universal profile of a company that is ready to go public, underwriters are generally looking for established sales in excess of ten million, net income approaching one million and continuing prospects for rapid growth. However, there have been many exceptions in recent times, including companies that have yet to make their first sale. These early stage situations must be accompanied by extraordinary circumstances that create excitement and the potential for substantial gain.

A strong and capable management team is the one indispensable ingredient for a successful public offering. Underwriters and investors will look to see if the management has performed well, has the ability to successfully implement their plans and can meet the added responsibilities of dealing with the outside financial community.

The decision on “going public” is a complicated one which is dependent on a number of factors including your company’s stage of development, current market conditions, your growth plans and the objectives of shareholders.

There are alternative means of raising capital that stop just short of a fully registered public offering. You won’t get the full benefits of being a publicly traded company but you can raise substantial capital at a lower cost and with fewer restrictions.

If you agree to solicit only sophisticated investors and limit their number within certain guidelines established by the S.E.C., you can be exempted from most of the registration and reporting requirements with a private placement or limited offering. An intrastate offering can be unrestricted in its size and be exempt from all S.E.C. requirements if a business is primarily located within one state, does the majority of its business in that state and sells its stock only to residents of that state.

Because its your business, work hard to get to the position of being able to go public and then consider all the factors before making the big step.

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