Article written by: Joseph Safina | Published by: Forbes Finance Council
Public companies like Apple and Facebook are often in the news, especially when they first launch an initial public offering (IPO). Going public is a great way to raise capital for a business. It raises a company’s public profile and perception, but it’s not an easy fix.
Going public changes the power dynamic of a company, splitting ownership and inviting regulatory scrutiny. It’s not for the weak of heart.
An IPO is only one way to go public, too. Direct public offerings and alternative public offerings are also popular. Whatever method you choose, your company will receive a valuation as it gains access to liquid capital.
If you think you’re ready to take your business public, here’s what you need to know to get started.
The first thing you’ll need is an underwriter. Investment banks traditionally serve as the lead underwriters and determine how many shares to issue and at what price. From there, the investment bank underwrites the shares, essentially taking legal ownership of them. Your investment bank then works with your attorney and the Securities and Exchange Commission (SEC) to draft your company prospectus and register the underlying securities.
After this process is complete, the underwriting bank begins to contract other dealer brokers, institutional investors and retail investors. This is who ultimately acts as the sales force for the stock. Of course, before any of that happens, registration needs to be approved.
Stock exchanges and the SEC have very strict requirements that must be met before accepting a new listing. Because of this, underwriters themselves have tight requirements. Here’s what Nasdaq (the most popular exchange) looks for in a public company:
1. A minimum of 1.25 million shares available to the public.
2. A regular bid price of $4 (lower prices may qualify if a company meets certain requirements).
3. At least 2,200 total shareholders, or 550 with 1.1 million average trading over the past year.
In addition, the company must meet one of the following four minimum standards:
1. Minimum aggregate pretax earnings of $11 million over the past three years, $2.2 million in the previous two, and no net losses in any of the prior three years.
2. Aggregate cash flow of at least $27.5 million over the past three fiscal years, $550 million average market capitalization in the past year, and $110 million revenue in the previous fiscal year.
3. Average market capitalization over $850 million over the past year, and $90 million in revenue for the fiscal year.
4. At least $160 million in market capitalization, $55 million in stockholder equity, and $80 million in total assets.
From there, the company needs to meet market standards to remain on the market. This includes financial audits, and you’ll need an initial audit to get started.
SEC-qualified audits are expensive, averaging $110,000 per audit for most companies, in my experience. This includes aggregate fees billed for assurance, along with any other related expenses. While that accounts for less than 1% of a company’s revenue and market value, it’s still a hefty cost. That cost is worth it, though, because these financial records will make or break any potential investment.
External audits are aimed at providing financial transparency. The audit team digs through to verify financial information, address any concerns and explain what will bring the business into compliance. In fact, let’s break down the full cost of going public, because it’s important.
Going public typically starts with a yearlong readiness assessment. This is followed by another yearlong IPO process. PwC estimates companies spend an average of $3.2 million to $6.9 million going public (not including underwriting fees), depending on the company size.
Costs include the external auditor, financial reporting advisor, legal costs, printing costs and other costs. Underwriting fees are the lion’s share, accounting for more than half the IPO budget. In addition, there are registration fees for the SEC and Nasdaq (or other market), FINRA filing fees and more. The expenses add up quickly.
This is why the readiness assessment is completed before pouring millions into a potentially lost cause. If you’re not ready, heed the advice of your auditor, and correct any issues immediately. It’s also expensive to remain a public company. If you’re not running a tight ship upfront, the problems will only compound. That brings me to the final point.
It’s a common myth that if you build an IPO, investors will come. No matter how strong or on-trend a business looks, market factors change fast. Just look at coworking space provider WeWork and cryptocurrency mining firm Bitmain. Both companies rode into 2019 on hot trends but failed to garner support for their respective public offerings.
Brokerage firms should continue acting as active buyers to keep interest in a stock high; however, depending on your banker to support your stock is a common mistake. Analyst coverage, public relations and investor relations must be properly funded and planned to ensure after-market support.
Many retail investors are looking to turn quick profits, so knowing there’s an active market keeps investors interested. Otherwise, early investors may be scared off if they see anything perceived as a stock dump.
Going public can be confusing, and it’s not guaranteed to work. Make sure you talk to a professional investment banker before taking the plunge. These firms take companies public on a regular basis and can answer any questions you have about the process.
ABOUT THE AUTHOR:
Joseph Safina is CEO of Safina Capital, specializing in large-scale funding,
M&A, business development and marketing.