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What Is Going Public?




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

What Is Going Public?

Basically, going public (or participating in an "initial public offering" or IPO) is the process in which a business owned by one or several individuals is converted into a business owned by many. It involves the offering of part ownership of the company to the public through the sale of debt or more commonly, equity securities (stock).

What are the Advantages and Disadvantages?

AdvantagesDisadvantages
Stronger capital baseShort-term growth pressure
Increases other financing prospectsDisclosure and confidentiality
Better situated for making acquisitionsCosts - initial and ongoing
Owner diversification and Restrictions on management
Executive compensationLoss of personal benefits
Increase company and personal prestigeTrading restrictions

What do I need to go public?

Audited financials and a good management team. The creditability and experience of your management team is the most important key in obtaining an underwriter and successfully completing a public offering. You also need a good outside team. These are your IPO consultants, accountants, attorneys, underwriters and PR specialists.

What's the Registration Process?

It requires a Registration Statement which is a carefully crafted document that is prepared by your attorneys and accountants. It requires detailed discussions on information pertaining to:

  • Business product/service/markets
  • Company Information
  • Risk Factors
  • Proceeds Use (How are you going to use the money)
  • Officers and Directors
  • Related party transactions
  • Identification of your principal shareholders
  • Audited financials

After your registration statement is prepared, it is submitted to the securities and exchange commission and various other regulatory bodies for their detailed review. When this process is completed, you and your management team will do a "road show" to present your company to the stock brokers who will then sell your stock to the public investors. Assuming they can successfully sell your issue, you'll receive your money. Then it's simple, all you have to do is make a lot more money with the proceeds so as to increase the value of your, your teams and the public investors stock.

Does my company qualify and will my offering succeed?

There are no guarantees in life or financing. In business, that's why they call it entrepreneuring. The atmosphere for making public offerings is always in flux. Talk with an underwriter, IPO consultant, accountant or attorney about the market prospects. Then ask yourself:

  • Can I show that my company can maintain consistent high growth?
  • Is the public aware of our type of product or service? Do they think its in a "hot" industry?
  • Can our company perform as well as and preferably better than our competition?
  • Can we meet the financial audit requirements?


Many underwriters require that your company is generating sales of $10 to $20 million annually with profits of $1 million. That your product is on the "leading edge" and that you have an experienced, proven top management team and can show future growth rates of at least 25% annually for the next five years. To obtain a NASDAQ listing, you need $4 million in assets and $2 million in net worth. However, there are a lot of exceptions and smaller companies can also become publicly held.

How much does it cost?

  • Legal - $50,000 to $150,000
  • Accounting - $20,000 - $75,000
  • Audit $30,000 - $200,000
  • Printing - $20,000 -$80,000
  • Fees $10,000 -$30,000
  • Plus underwriter commissions and expenses as well as numerous expenses on the part of the company.

How long will it take?

3 -12 months (6-9 average)

 

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