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Direct Public Offering: Estimates of Costs




Description

This article is from the Investing Articles: Public Offerings: IPO and DPO series.

Direct Public Offering: Estimates of Costs

Costs and Expenses

The offering with the least initial up-front costs are the offerings that allow an issuer to "test the waters" by soliciting public indications of interest prior to incurring the major expense of preparing an extensive disclosure document and, in some cases, registering the security under state law. Since California, New York, and Texas are three of the major states for investors, the summary below assumes an offering under California Corporate Securities Act section 25102(n), which would be exempt in California and Texas, and available in New York through a broker- dealer after filing the State Notice and Further State Notice. The offering may be made in other states if the offering is "qualified" or "registered" under each such state's Blue Sky Laws.

Estimate of Legal Fees

(1) Legal due diligence fees, preparation of selling agreement with underwriter, and preparation of the general announcement document - $10,000-$15,000, of which $7,500 is a deposit and the balance is subsequently billed.

(2) Preparation of a disclosure statement and/or registration of the securities in one or more states - $15,000-$25,000 (or more depending on how much work the issuer puts into preparing the documents and how well the issuer works with the attorney).

(3) Travel expenses and other out-of-pocket expenses.

This summary is based upon the following assumptions: the company is "clean", meaning the articles of incorporation, the bylaws, and the material contracts do not need to be revised or amended; the officers do not have securities laws violations, bankruptcies, or other issues in their past; there is a simple capital structure without multiple layers of securities and debt; the company's officers are available and cooperative and do much of the work, particularly in drafting the disclosure documents; the company's officers and shareholders are decisive and take advice and follow instructio s readily and precisely; the company does not present abnormal business risks (for example, a start up is obviously more risky than a company with several years of profitable business, and a start up with significant prior investment and a completed or near completed product is less risky than a start-up that is a concept only); the shareholders are realistic about the valuation of their company. These estimates are based upon the estimated number of hours multiplied by the hourly rate. If the number of hours is fewer than estimated, then the costs will be less than estimated; if the num er of hours is more than estimated, then the cost will be greater than estimated.

In addition, the issuer might have the costs of its own attorney's fees. Accordingly, an issuer may wish to consider jointly retaining the attorney with the underwriter and executing an appropriate waiver of conflict of interest. In such cases, the attorney would take on additional responsibilities normally undertaken by the issuers counsel, which would involve some unknown amount of fees. Typically, however, the issuer may expect that the amount of attorneys fees would be significantly reduced by retaining one attorney to conduct the offering.

Attachments

Regulation D

California Corporate Securities Law Section 25102(n)

Texas Exempt Sales to Accredited Investors

SEC Regulation CE, Rule 1001

 

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